UPDATE 2-Bahrain cbank takes control of Saudi groups' banks

* Central bank takes over business of Awal, TIBC

* Banks part of debt-ridden Saudi groups Saad and Algosaibi

(Adds quotes, background)

By Frederik Richter

MANAMA, July 30 (Reuters) - Bahrain's central bank has seized two banks belonging to two debt-laden Saudi conglomerates in the latest move in the Gulf Arab region to manage the fallout from their financial troubles.

The central bank said on Thursday it had assumed control of Awal Bank, owned by Saudi group Saad [SAADG.UL] and The International Banking Corporation (TIBC), which is owned by Ahmad Hamad Algosaibi and Brothers (AHAB).

TIBC had assets of $3.8 billion and Awal Bank had $7.6 billion at year-end.

The two troubled Saudi groups are restructuring debt and a number of court cases have been filed by different parties over alleged financial irregularities in what has become one of the largest financial scandals in Middle East history.

"This obviously means there was insufficient risk management on the part of these banks before," said economist Eckart Woertz at the Gulf Research Center in Dubai. "Going ahead, the central bank will need to put up tougher regulations and the risk management of banks needs to improve."

Saad's chairman Maan al-Sanea is alleged to have siphoned about $10 billion out of the Algosaibi family company into his own business, according to court papers. Saad has said it has no business links with Algosaibi.

The central bank, which said on June 23 it had launched an investigation at TIBC, did not provide a detailed reason for its decision and only referred to an article of its banking regulations.

A spokesman for TIBC confirmed the central bank's decision but declined further comment, while Awal Bank was not immediately available for comment.

"Both banks are pretty small players in the context of the Bahrain banking industry, but it creates a doubt over the banking system," said a Dubai-based banking analyst who did not wish to be named.

"The central bank must have felt the situation has reached a stage where they have to intervene to protect the whole system."

Standard & Poor's said last week that 30 Gulf Arab banks had a combined exposure of $9.6 billion to the two groups, while banks outside the Gulf including BNP Paribas (BNPP.PA) and Citi (C.N) are owed a total of more than $6 billion by Saad Group.

The world's biggest oil-exporting region has been hit hard by the global finance crisis, which has highlighted problems of transparency and weak regulation. The apparent suicide this week of Kuwaiti financier facing a fraud suit by U.S. authorities further jolted the region's financial sector. Kuwait is home to the Arab world's second largest bourse but has no financial regulator. (Reporting by Frederik Richter; Editing by Firouz Sedarat/Ruth Pitchford)