UPDATE 3-Bahrain cbank takes control of Saudi groups' banks

* Central bank takes over Awal Bank, TIBC

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

* Central bank to appoint administrator to pay out creditors

(Adds quote, details on investigation, Algosaibi statement)

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 in a statement on Thursday it had assumed control of Awal Bank, owned by Saad Group [SAADG.UL] and The International Banking Corporation (TIBC), a unit of the Ahmad Hamad Algosaibi and Brothers conglomerate.

The central bank said an investigation at both banks had shown a substantial shortfall in assets compared with their liabilities and that it would appoint an external administrator to identify creditors' claims and manage the distribution of the remaining assets.

TIBC had assets of $3.8 billion and Awal Bank had $7.6 billion at end-2008, according to information on their websites.

The two troubled family-owned groups are restructuring debt and a number of court cases have been filed by different parties, including Deutsche Bank (DBKGn.DE) [ID:nN29290576], over alleged financial irregularities in what has become one of the largest financial scandals in Middle East history.

Standard & Poor's said last week that 30 Gulf Arab banks had a combined exposure of $9.6 billion to the two groups. 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.

"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, a Saudi billionaire who became known when he spent $5.29 billion on a 3.1 percent stake in HSBC HSBC.L, is alleged to have siphoned about $10 billion out of the Algosaibi family company into his own business, according to court papers in a lawsuit filed in New York State Supreme Court earlier this month.

Saad has said it has no business links with Algosaibi.

The central bank said it was investigating "certain persons" in the management of both banks, investigating whether they complied with the central bank's requirements for holding positions in the banks.

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

Algosaibi said in a statement that appointing administrators for TIBC helped helped resolving the banks' issues. [ID:nLU605475]

BANKING HUB

Bahrain has established itself as a regional offshore banking centre mostly catering to oil-rich Saudi Arabia, and the events at Awal Bank and TIBC have challenged the central bank's reputation of being a rigid and transparent regulator.

"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."

Moody's Investors' Service said the move was a positive step to contain the possible impact of the banks' troubles on the wider banking sector, but that more information was needed.

"The whole story is still unclear ... Was it a lapse of controls? It is still very difficult to predict what's to come until we get a clear understanding of what happened and why," said Mardig Haladjian, general manager at Moody's. [ID:nLU578754]

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 a 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 and Stephen Nisbet)