x Abu Dhabi, UAEFriday 21 July 2017

Bahrain seizes control of banks

The two banks seized are owned by Saad and Al Gosaibi, Saudi groups with debt problems, with the action 'to contain economic fallout'.

Bahrain has seized control of two banks owned by a pair of struggling Saudi family conglomerates. The country's central bank said yesterday it "assumed the administration" of Awal Bank, which is owned by the Saad Group, and The International Banking Corporation (TIBC), which is owned buy Ahmad Hamad Al Gosaibi and Brothers.

The Saad and Al Gosaibi groups are in the middle of restructuring billions of dollars of debt borrowed from banks across the region. The central bank said in a statement that Awal and TIBC had "substantial shortfalls of assets versus liabilities". It added that it was investigating "certain persons" connected to the two banks. "This is a highly unusual step," said Eckart Woertz, an economist at the Gulf Research Centre. Usually, he said, the state, in this case the regulator, would take control only when it needed to contain the fallout on the broader economy. "You only do this when no other parachute is available."

The Al Gosaibi group yesterday welcomed the decision, saying that bringing TIBC under the central bank's aegis would smooth the path towards a resolution of the company's looming debt problems. "We have been seeking solutions with these partners over the last few months to answer outstanding issues and the naming of the new administrator will assist all interested parties facilitate a resolution," the company said in a statement.

The banks' parent companies have missed loan payments and owe an estimated US$22 billion (Dh80.8bn) to creditors around the world. Standard & Poor's estimates that 30 Gulf banks alone are owed $9.8bn. Awal Bank is owned by the Saudi billionaire Maan al Sanea and two of his family companies, while TIBC is owned by the Al Gosaibi group. The two families, which are linked through Mr al Sanea's wife, have several lawsuits filed against them.

Two weeks ago, Al Gosaibi filed a lawsuit in the US against Mr al Sanea, alleging he diverted about $10bn from the company's coffers into his own. On June 23, the Bahrain central bank said it launched an investigation of TIBC, but did not elaborate. Mr Woertz called the central bank's latest action "highly unusual according to the textbook". But he said that such intervention by regulators had become more common during the financial crisis. "Look at AIG or Fanny Mae, where the Federal Reserve intervened in a massive fashion," Mr Woertz said.

The British government took control last year of the mortgage lender Northern Rock, which almost collapsed in 2007. Later in the year, the US government effectively nationalised the insurance giant American International Group when it extended an $85bn loan to the firm. "A step like this is not taken lightly. It is a last resort. A central bank would only do this to cover up a wound," said another economist who declined to be named. "You want to contain distressed banks to make sure their troubles don't spill out into the broader banking sector."

* with agencies uharnischfeger@thenational.ae