Gulf Bank sold clients FX derivatives that blew up — and Kuwait guaranteed every deposit

In October 2008, at the height of the global financial crisis, Gulf Bank — Kuwait's third-largest bank — told the Central Bank of Kuwait that some of its clients had suffered losses in derivative contracts after the euro dropped sharply against the US dollar. The clients refused to honor their commitments and cover the losses, so the bank said it would absorb them itself until the disputes were resolved.

The structure of the trades was the mistake: Gulf Bank had sold leveraged FX derivatives to corporate clients in a way that left the bank carrying the loss when counterparties walked away. The CBK announced on 26 October 2008 that it would support the bank, and trading in the bank's shares was halted as depositors queued.

The numbers came out in March 2009: Gulf Bank posted a net loss of KWD 359.5 million ($1.2 billion) for 2008, driven by what chairman Kutayba Alghanim called 'exceptional losses incurred in its derivatives operation.'

The damage went systemic. To stop contagion, the CBK asked the government to guarantee all bank deposits; parliament passed an unlimited deposit guarantee eight days later, covering KWD 24 billion ($84 billion) in deposits — a policy Kuwait still had not terminated as of 2022.

KWD 359.5M ($1.2B) net loss for 2008; clients' losses landed on the bank; Kuwait had to guarantee all deposits, KWD 24B ($84B) of them.

The bank sold complex FX derivatives to clients without ensuring they could — or would — honor the losing side.

Counterparty credit risk on client trades was effectively uninsured, so client defaults became bank losses.

Risk controls treated client derivatives as off-balance-sheet products until they weren't.

The scale of the exposure only became visible when a single currency move triggered it.

Derivatives sold as client products still sit on your balance sheet if the client can — or will — refuse to pay. Counterparty risk is your risk.

The CBK propped up Gulf Bank, Kuwait passed an unlimited deposit guarantee covering KWD 24B ($84B), and the bank rebuilt capital and returned to profit. The IMF has repeatedly urged Kuwait to replace the still-active unlimited guarantee with capped deposit insurance, warning of moral hazard.