Notes on the Proposed Bank Restructuring Law

On 10/11/2023, the Banking Control Commission submitted a proposed law for restructuring and reforming the Lebanese banking sector to the Council of Ministers titled, “Reforming the Situation of Lebanese Banks and Re-organizing them”. The law’s main goals are: to promote financial stability; to preserve banking functions; to protect deposits by establishing a “minimum  protected deposit amount”; and to use as little as possible of public money.

The law follows a standard process for reforming and liquidating banks. It sets to establish a higher banking commission that would decide which banks “need to be reformed” and which banks “need to be liquidated”, after an objective appraisal is applied to each bank. This is done by finding the net value of assets for each bank and then considering action that would restore it to balance. In the process, losses would be absorbed along a “standard ordering”, starting with shareholders equity, then bonds, and then deposits, the latter excluding those of the social pension fund, foreign embassies, and regional and international organizations. In addition, banks considered viable for reforms will be subject to measures including bail-in, recapitalization from new investors, sale of some assets and liabilities to other financial institutions, and mergers. Viability is determined by the ability to meet the new minimum capital and liquidity requirements, in addition to the ability to honor liabilities and regulations and to attain profitability.

As it is a standard model for bank reform and liquidation, one of its drawbacks is that it doesn’t take into account the special Lebanese situation, which is characterized by the fact that almost 90% of USD deposits are held by BDL that lost most of them through government expenditures. As such, the law doesn’t explicitly account for that anomaly but simply states that banks’ losses from their USD deposits at BDL should be dealt with in the context of the Government’s economic and financial reform plan. Another drawback is that the law does specify which exchange rate will be used in the calculation of the net value of assets, though to be fair it left that to be determined by BDL.

As important article 4 of the law states that foreign branches should be subject to the proposed law, unless foreign laws and regulations stipulate otherwise. However, this is invalid, because foreign branches are usually fenced off and have their own separate balance sheet. Another major drawback is article 46, which states that “protected deposits” should be whichever is higher between either the remaining balance of USD deposits after reform measures are undertaken or the minimum deposit amount as set by the Government plan. But that would be detrimental to banks because paying it would drive their restored equity back to zero, which is against the spirit and purpose of the whole bank reform process!

That said, the proposed law is a decent detailed first draft and is an important pre-requisite for any deal with the IMF. But, though its enactment is essential, it needs to be reviewed by all parties concerned – especially ABL – so as to preserve the viable interests of each. And, to be complete, it also needs the prior enactment of the Government reform plan and program.

 

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