Moody’s: Loss of Correspondent Banking Relationships Would Accelerate Lebanon’s Economic Decline

In an Issuer Comment published on 20 April 2021, Moody’s commented that “encroaching on banks’ mandatory reserves held at the BdL amid a persistent government deadlock would increase banks’ counterparty risk, jeopardizing Lebanon’s remaining correspondent banking relationships, further undermining access to cross-border payment services for remittances, trade and tourism, which are key pillars of the economy”.

The Comment explained that “compliance with commercial banks’ mandatory reserve requirements within the BdL’s financial stability framework includes setting aside the equivalent of 15% of total foreign-currency deposits because of the economy’s high degree of deposit dollarization, which has exceeded 80% since last June”. The rapid drawdown of usable foreign-exchange reserves, when netting out these mandatory reserves from gross foreign exchange reserves held at the BdL, has left usable reserves at $1B as of the end of February, and close to half of that as of the end of March.

Interestingly, Moody’s also proposes an alternative measure to estimate usable foreign-exchange reserves by netting out “the portion of gross foreign-exchange reserves that represents the counterpart to commercial banks’ net foreign liability position that would otherwise raise counterparty risk concerns with foreign counterparties”. Commercial banks, since 2011, have run up exposures to nonresident counterparties that have not been matched by the accrual of foreign securities or assets held abroad, resulting in a negative net foreign asset position. Based on this more restrictive measure, as shown in the figure below, usable foreign-exchange reserves were exhausted last year.

The Comment concluded that a “permanent loss of correspondent banking relationships would increase Lebanon’s dependence on official external funding to the extent that cross-border payment and clearing services would remain impaired even after a comprehensive debt restructuring, inhibiting any potential recovery”.


Moody’s: Loss of Correspondent Banking Relationships Would Accelerate Lebanon’s Economic Decline

Leave a Reply

Your email address will not be published. Required fields are marked *