Given that traditional regulation permitted financial vulnerabilities to go unchecked, contributing to the 2008 financial crisis, authorities in many countries have been studying a more systemic approach to financial regulation. It was only after the global financial crisis that policymakers fully came to realize the costs of a systemic disruption in modern financial markets and the need to keep systemic risk in check. As a result, the macroprudential approach has been implemented.
Although in most developed economies the use of macroprudential policies proliferated after the 2008 crisis, Banque du Liban successfully implemented them long before and tamed systemic risk in the banking sector during periods of financial stress. Macroprudential policies in Lebanon have historically attenuated potential financial stress that emanates from unstable credit growth in the banking sector. For example, by mandating relatively high reserve requirement ratios – 15 to 25 percent on LBP and 15 percent on foreign currency liabilities – BDL hinders the risky creation of money through fractional reserve banking. This policy, in turn, achieves a healthy environment for the financial sector characterized by diminished upward inflationary pressures, a liquid banking sector, and stable credit growth.
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