Did BDL USD Reserve Liabilities Contribute Badly to the Crisis?


Trillion LBPDec 2001Dec 2009Dec 2015Dec 2018
Required Reserves RR:
    RR in USD6.513.922.227.6
Total Reserves TR10.553.2106.3196.2
Excess Reserves ER1.331.070.9155.9

Source: BDL

Before 2001, the required reserve ratio on all LBP deposits was 13% and on USD deposits was 0%. Since then, the required reserve ratio on current LBP deposits has changed to 25% and on saving LBP deposits to 15%, while the ratio on all USD deposits has been set at 15%[1]. In addition, since 2001, BDL has assumed settling USD checks within the Lebanese banking sector – the only central bank in the world which does that[2].

In 2001, too, the Paris II conference took place, in which the country undertook some fiscal reforms (primarily VAT) to reduce its mushrooming debt, but it seems that there was an implicit agreement to keep the exchange rate fixed vis a vis the USD (at 1507.5 LBP) come what may. In consequence, BDL not only started imposing required reserve ratio on USD deposits, but also facilitated placements in deposits and CDs by commercial banks at BDL, the main purpose of which was that BDL would have a war chest of USD reserves to support the exchange rate peg.

As we see from the above table, these policies – especially the financial engineering measures that were undertaken starting in 2016 – allowed BDL to accumulate by December 2018 close to 156 trillion LBP in excess reserves, about two-thirds of which in USD. These excess reserves represented 60% of the deposits base and implied a breakdown in the intermediation role of commercial banks as most of their liabilities were now invested at BDL.

More importantly, BDL policy measures starting in 2001 have imposed voluntary dollarization on the economy, and have made preserving the peg the ultimate purpose of monetary policy by using reserves that it can’t issue until they are exhausted, and in the process eroding customers’ deposits, which is the situation we have now. And it is in this sense, that BDL’s USD reserve liabilities have been a prime catalyst of the crisis. And, of course, the lesson from all of this is never to repeat the mistakes of 2001!

[1] In 2021, it was changed to 14%.

[2] Before that, it was done by a designated Lebanese commercial bank.

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