US embassy cable - 04MANAMA744

UNCLAS SECTION 01 OF 03 MANAMA 000744 
 
SIPDIS 
 
DEPT FOR NEA/ARP AND NEA/RA 
DEPT PASS USTR JASON BUNTIN 
TREASURY FOR LEILI MOGHTADER 
 
E.O. 12958: N/A 
TAGS: EFIN, BA 
SUBJECT: BAHRAIN INTERNATIONAL BANK (BIB) LIQUIDATION 
 
REF: 03 MANAMA 850 
 
1. SUMMARY: A May 4 Asset Realization Protocol (ARP) 
formally launched the liquidation of Bahrain International 
Bank (BIB) after nearly three years of post-9/11 
creditworthiness problems.  While poor bank management and 
strategy caused the failure, the Bahrain Monetary Agency 
(BMA) should have acted sooner and more decisively.  While 
BIB is the only bank to collapse recently in Bahrain, it is 
one of three banks troubled during the past year.  Taken 
together, these have tarnished Bahrain's image as a well- 
regulated banking center.  The BMA is taking steps to 
enhance its regulation of the sector, which should restore 
its reputation. END SUMMARY. 
 
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BIB GOES UNDER 
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2. Bahrain Monetary Agency (BMA) and investor efforts to 
resolve the financial standing of bankrupt Bahrain 
International Bank (BIB) have failed. The BIB was delisted 
from the Bahrain Stock Exchange, as recommended by the 
bank's temporary committee to the BMA's Capital Markets 
Control Directorate, which approved the move.  In a move 
sponsored by the BMA, On May 4 BIB shareholders, lenders, 
and depositors formally agreed to an Asset Realization 
Protocol defining the terms of sale to liquidate BIB assets 
to repay lenders, shareholders, and depositors. 
 
3. Bahrain International Bank (BIB) was established in 1982 
as an offshore commercial bank with approximately 7,600 
shareholders, primarily from the GCC and predominantly from 
Bahrain and Kuwait. The bank's principal operations included 
direct corporate investment and real estate development in 
the United States and Europe, as well as financial advisory 
services, according to Capital Intelligence (CI) ratings 
service. CI highlighted the recessionary period in the Gulf 
during the early to mid-eighties as a factor in the bank's 
early troubles in developing its commercial banking 
activities. This served as a rationale for the bank's focus 
on investment operations run primarily from its subsidiaries 
in the US and UK. However, subsequent downturns in the 
bank's investment portfolio, most significantly since 2001, 
had forced the bank to liquidate its U.S. and European 
corporate bond portfolios. The move intended to allow BIB to 
gain temporary liquidity in order to refinance the bank's 
debt, according to CI. 
 
4. BMA Executive Director of Banking Supervision, Dr. Khaled 
Ateeq, highlighted September 11 and the subsequent risk 
climate as overriding factors in the bank's downturn. 
Significant investments in the United States and the 
subsequent dramatic slide in investment returns hurt the 
bank's financial standing, he told EconFSN May 9. Although 
agreeing with the post-2001 trend, BIB term lender Gulf 
International Bank (GIB) Managing Director for Risk 
Management Mohannad Farouki stressed to EconFSN on May 18 
faults in BIB's broader strategy, which involved investments 
of short-term liabilities into long-term assets.  Farouki 
noted that BIB's post-2001 high yield investments were hit 
badly, while the impact on the bank's private equity 
portfolio was even more severe. 
 
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BMA STEPS IN-BUT TO NO AVAIL 
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5. Dr. Ateeq told EconFSN May 9 that the BMA had been aware 
of BIB's troubles from the outset and notified the bank's 
board of directors to increase capital in order to 
reestablish creditworthiness. However, Ateeq added, BIB's 
board could not raise the necessary capital and therefore 
did not fulfill the bank's obligations to its investors and 
depositors. In response to questions of effective financial 
supervision, Ateeq noted the significant efforts of the BMA 
over the past two years in seeking to find a recovery 
formula for the bank to save it from liquidation. Such 
measures were regarded as the BMA's preferred course of 
action in order to bolster the capacities of institutions 
and substantiate the regulator's supportive role in a 
banking hub. This is in line with BMA Governor Ahmed Al 
Khalifa's December 13, 2003 statements in the local press 
that the failure of financial institutions could impose 
significant costs on society as well as impact confidence 
Bahrain's banking system. 
 
6. The BMA cooperated with creditors to assist BIB's 
recovery. The bank was unable to overcome its liquidity 
problems due to bad management, Ateeq told EconFSN May 9. As 
a result, negotiated efforts undertaken by the BMA, 
creditors, depositors, and shareholders determined the 
corrective actions for the bank and eventually 
considerations of asset liquidation. In January 2004, an 
extraordinary general assembly meeting undertaken by the 
bank's principal shareholders resulted in an agreement to 
settle the bank's liabilities over the medium term. On May 
5, local newspapers reported the agreement reached May 4 to 
establish an Asset Realization Protocol (ARP) announcing 
BIB's liquidation. 
 
7. The agreement allowed for the establishment of a 
specialized committee including creditors and officials from 
the BMA, as well the appointment of an ARP manager. Both 
entities would be responsible for overseeing the liquidation 
or sale of BIB's assets. The final agreement, as stipulated 
under the ARP, called for 85 percent of revenue gained from 
assets sold to be distributed to depositors and 15 percent 
to bank creditors. Following the full repayment of 
depositors, the remainder of the proceeds will go to bank 
creditors, in accordance with BMA guidelines that give 
depositors priority, Ateeq told EconFSN May 9.  Any proceeds 
remaining after full repayment to depositors and creditors 
would be distributed to shareholders. GIB's Farouki 
suggested to EconFSN May 18 that finding a resolution to the 
BIB bankruptcy was not an easy matter and essentially a no- 
win situation for those involved. As a lender to BIB, 
Farouki did not expect GIB or other term lenders to receive 
more than 23 cents per dollar of assets sold. 
 
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POINTING FINGERS: BANK MANAGEMENT, FINANCE MINISTER AND BMA 
ALL IMPLICATED IN BANK FAILURE 
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8. On April 14 local newspapers reported on parliamentary 
inquiries into the BIB affair. Parliamentarians raised 
questions of the BMA's role leading up to the bank's 
bankruptcy, possible penalties to banking executives, and 
questions about whether other banks in the country in the 
same situation. According to these reports, Minister of 
Finance and National Economy Abdullah Saif stressed the 
efforts of the BMA to resolve BIB's liquidity problems and 
highlighted that BIB's assets only accounted for 0.4 percent 
of Bahrain's total bank assets.  Saif placed the blame on 
the bank's board members and executives who failed to 
conform to BMA guidelines and were not qualified to 
effectively manage BIB. BIB's circumstances were brought up 
in later inquiries by parliamentarians into financial 
irregularities relating to the Minister's (mis-)management 
role as chairman of the national pension fund. Local 
newspapers on April 21 further accused the Minister of not 
taking assurances from the BMA regarding fund deposits in 
the Bahrain Saudi Bank, another bank suspected of financial 
irregularities. 
 
9. Reiterating his position that BIB's chief executive and 
board members were unfit to assume positions in Bahrain's 
banks, Ateeq told EconFSN May 9 that shareholders, 
creditors, and depositors were free to take legal action 
against BIB banking officials and chief officers. Farouki 
noted that the BIB collapse could have been avoided if the 
bank had not risked client money to pursue its investments 
in the first place. However, Farouki noted to EconFSN May 18 
the evident complexities in imposing more direct BMA-issued 
punishments on BIB and its executives. In the absence of 
practical punitive solutions, Farouki told EconFSN that he 
agreed with Ateeq's suggestion that legal cases brought 
forth by investors, lenders, and depositors would be the 
most effective course of action. 
 
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BAHRAIN'S BANKING IMAGE SUFFERED 
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10. Farouki told EconFSN May 18 that irregularities 
involving three Bahrain-based banks-Bahrain Saudi Bank 
(BSB), Bahrain Middle East Bank (BMEB) and BIB--in the 
course of a year did tarnish the country's banking image. 
Potential collapse of BSB and BMEB was averted through BMA 
action. Only the BIB has declared bankruptcy. 
 
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BMA INTERVENTION AT BAHRAIN MIDDLE EAST BANK HAVING EFFECT 
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11. The only other bank in Bahrain currently facing 
difficulties is Bahrain Middle East Bank (BMEB), Ateeq told 
EconFSN May 9.  By contrast to BIB, BMEB is now in the 
process of arranging creditors and refinancing to re- 
establish the bank.  Ateeq emphasized that unlike the case 
of BIB, BEMB has made a commitment to the shareholders and 
others.  As a result of the BMA's regulatory guidance and 
supervision, the bank is very likely to survive, Ateeq 
added.  GIB's Farouki supported this assertion, stating May 
18 that as long as the bank effectively manages its expenses 
it will be able to recover. However, the Bahrain Middle East 
Bank case was not as bad as the BIB affair, Farouki told 
EconFSN. 
 
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BMA TAKING ACTION TO IMPROVE REGULATION, BOLSTER IMAGE 
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12. In response, the BMA is taking steps to improve bank 
regulation.  Pursuing initiatives to promote risk awareness 
in the country's banking industry, the BMA sponsored a risk 
survey conducted by PriceWaterhouseCoopers to gauge common 
issues facing the banking industry. The BMA also issued new 
corporate governance guidelines for banks in the country. 
The new guidelines define operational and managing 
supervision criteria for bank executives and board members 
in order to ensure effective management as well as ensure 
performance monitoring. In addition the BMA has sought to re- 
define punitive measures for banks not abiding by BMA 
regulatory guidelines and mandates, according to March 31 
local news articles. 
 
13. COMMENT: The BIB experience should serve as a case study 
in the value of transparency.  Through it, the BMA has 
accepted the principle that ignoring a bank's problem or not 
taking swift action in accordance with established 
regulation is counterproductive in the long run. 
Overlooking this problem for too long meant its resolution 
was not in the best interest of stakeholders and caused 
public embarrassment.  FTA commitments to greater financial 
services regulation and transparency combined with this 
lesson could improve the sector and enable it in time to 
recover its former luster.  END COMMENT. 
 
NEUMANN