Yuppies, Drugs and Tesco: Should the Bank of England Blame Itself for Bank Failures?

In the early 1980s Tesco had provisionally agreed plans with the property developer, Provincial Properties Wales, to build a new store in Barry. Michael Hepker, the owner of Ravensbury Investments, was keen to buy into the project and persuaded Johnson Matthey Bankers (JMB) to lend him the capital to purchase Provincial Properties. JMB were to have the store as security for the loan. Unfortunately, planning permission for the building was refused, but, if accusations subsequently made in the House of Commons are to be believed, this fact was never disclosed to JMB. The bank never thought to check on the progress of the building work, so it remained blissfully unaware that its loan was unsecured. At the same time, JMB was lending ever increasing amounts to another client, who was later convicted of fraud in New York in October 1994. Together these two concentrated exposures exhausted JMB's capital base, so that when repayments started to dry up the bank faced collapse. The Bank of England (the Bank), as lender of last resort and UK supervisor of the banking industry, became concerned because JMB was regarded as playing a key role in maintaining the UK's central position in the international gold bullion market. The Bank feared a run on gold deposits which might have spread to the ordinary and unconnected deposit‐taking industry and perhaps led to a currency crisis. The markets were already edgy after the collapse of Continental Illinois National Bank in the USA, which had prompted a run on the dollar, and so the Bank believed it might have been difficult to persuade the markets that JMB's problems were confined to its lending business only. As a result of the JMB debacle, Barry never got its Tesco's and the Bank of England found itself obliged to rescue JMB using money from the government and City institutions.