Bank of England officials "shut their eyes and turned away" instead of clamping down on fraudulent activity at BCCI, the High Court has been told.
Liquidators of the collapsed bank are suing the UK's central bank for about £1bn for "knowingly or recklessly" failing in its supervisory role.
They are acting on behalf of 6,500 UK-based depositors, who lost money when the rogue bank was shut down in 1991.
The Bank of England says it plans to defend itself "vigorously".
Gordon Pollock QC, for the liquidators, said the Bank "deliberately ran away from seeking to find out sufficient information about BCCI because it didn't want to be drawn into the role of supervisor".
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Mr Abedi, the bank's founder, could get you girls, boys or seats at the opera, said the complainants' lawyer
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He said the Bank of England "was once - and I emphasise once - one of the most revered and respected public institutions in this country".
And he accused the Bank of "positively misleading" the Bingham inquiry which was set up after BCCI collapsed and reported in 1992.
Mr Pollock said that the Bank of England knew that it, rather than the "chocolate box Ruritania" of Luxembourg, should be the lead regulator of BCCI.
But he said that Bank officials put their own interests above those of the depositors.
Mr Pollock will be spending the next 12 weeks outlining the case against the Bank of England, drawing on some 40,000 internal documents the plaintiffs have forced the Bank to release.
The case took 10 years to reach the courts.
It is the first such action the central bank has faced in its 300-year history.
Waste of money?
MP Keith Vaz, who has campaigned on behalf of BCCI creditors and employees, says the case is a waste of money - cash which he believes should go to the creditors.
If the BoE lost the case, the taxpayer would pay, he said. If the liquidators lost, the creditors would pay.
The trial is expected to last about 18 months, and legal costs could exceed £55m ($100m).
So far the liquidators have managed to recover 75% of the money lost by BCCI creditors, among them many small Asian businesses.
Proving 'misfeasance'
BCCI TIMELINE
The Bank of England has been criticised in the past for its poor oversight of the banking sector.
In 1997, after Labour came to power, the watchdog role was moved from the bank to the new Financial Services Authority.
However, the Bank is legally protected from negligence claims.
The liquidators are therefore pursuing the stronger claim of "misfeasance", which implies that Bank officials were not just reckless but acted dishonestly. Lawyers describe misfeasance as the "wrongful exercise of lawful authority".
Tangled web
BCCI was founded in 1972 by Pakistani businessman Aga Hasan Abedi.
It operated in 60 countries and its regulation was split between the Bank of England, the Cayman Islands and Luxembourg, which led to difficulties when it was being wound up.
During the 1980s, evidence emerged of BCCI's links with terrorist organisations, arms shipments to Arab states and South American drug cartels.
According to Deloitte, the Bank of England wrongfully granted BCCI a licence, and did not act quickly enough to withdraw it.
The case, which could turn out to be one of the most expensive in legal history, has broad implications for the future of financial supervision in the UK, say legal experts.
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