A Brief Look at the New Financial Reform Plan Approved by the Mikati Government

The parliamentary elections are over, and now it’s time to get back to reality.  The post elections phase will be tough on Lebanese people; and the famous circular 161 that was used before the election to maintain a stable exchange rate is now partially dead despite the BDL claims that the circular is still effective.  The national currency has plunged to a very low range (above 34,000 LBP/USD), while the inflation rate is above 200%, and Lebanon needs an emergency rescue plan to heal the country from this unprecedented economic crisis.

Several financial reform plans were considered by previous governments; however none of them have been implemented. The new financial plan approved by the Mikati government is the latest, and it focuses on the restructuring of the financial sector, specifically the banking sector.

The new plan, the Financial Sector Restructuring Strategy (FSRS),  is based on three essential pillars:

  • Resolving the interconnections between the balance sheets of commercial banks, sovereign debt, and the balance sheet of BDL
  • Recapitalizing BDL , and improving its financial reporting process, in order to restore confidence
  • Restructuring and capitalizing sustainable commercial banks, by injecting new capital after absorbing losses.

As to principles of the FSRS, the most important is to respect the hierarchy of distributing losses, by first canceling the capital of equity holders, then the subordinated debt securities, and finish up with depositors. The other important principle of this plan is the protection of small depositors to the maximum extent possible in each viable bank. For this purpose, a standard minimum protection will be established, which will apply to all depositors, in any of the banks that will be considered viable.

In all terms, the expected losses of the banking sector are around $70B. One of the most salient points of this new plan is to cancel or delete the debt of BDL owed to the Lebanese commercial banks.  As such, some if not all of these banks will be dissolved, while the plan will focus on restructuring and recapitalizing banks that will continue to operate after absorbing the losses.

The other major point is to unify the exchange rate, through Sayrafa platform, as this will be the only legitimate platform to identify the price of national currency against the dollar. Also, the plan includes amendments to banking secrecy law, in order to facilitate the work of Banking Control Commissions.

The recapitalizing of the banking sector won’t only target the commercial banks but also the central bank that in turn will be subject to the full audit of the Central Bank’s forex financial standing. In consequence, the government will cancel, at the outset, a large part of the Central Bank’s foreign currency obligations to banks in order to reduce the deficit in BDL’s capital.

The plan also involves issuing sovereign bonds amounting to $2.5B, which will be used to partially recapitalize BDL and will be subject to increases depending on the financial situation.

Additionally, the plan details the complete process of recapitalization of the banking system. In this respect, the plan suggests to convert deposits – those above the protected levels for small depositors — into shares through the bail in policy, or convert part of them into Lebanese pound at a specific exchange rate. Furthermore, and as important, the new or old shareholders will have to inject new capital into viable banks in order to restore minimum capital adequacy.

As a final step, the plan commits to new legislations so as to insure a healthy banking environment, by facilitating access to information, enforcing governance, and ensuring the independence and accountability of the BCC through increasing efficiency in terms of early interventions.

Finally, how good is this plan? It is first and foremost unjust, as it makes bank shareholders and depositors absorb all BDL losses while the government absorbs none especially that more than $20B of these losses were loans to the government. Will the plan be approved by parliament and civil society? Already the Association of Banks has rejected the plan and some major political parties have done the same. So it will most likely – and surely rightly – be an upward struggle to implement the plan unless the distribution of losses is more justly applied.


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