Lebanese Banks’ Capital: Value and Currency Composition

Lebanese Banks’ Capital: Value and Currency Composition

Lebanese Commercial banks: Capital Accounts

* Assuming the estimated 1 to 5.6 ratio between LBP and USD components as obtained in February 2023

** Assuming the estimated 1 to 10 ratio between LBP and USD components as obtained in January 2024

The capital accounts of Lebanese commercial banks as published monthly by BDL comprise core capital (close to 85% of the total), supplementary capital (excluding Tier 2), and non-resident accounts. Not surprisingly, they have undergone considerable changes since the beginning of the crisis. In October 2019, on the eve of the crisis, when valued at the official exchange rate of close to 1,500 LBP per USD, they stood at $20.7 billion. By end January 2023, they had fallen to $11.63 billion at the same official exchange rate, though the market rate at the time was 58,000 LBP. Unfortunately, BDL doesn’t publish the currency composition of the capital accounts, so we have no way to know how much of these accounts are in USD and in LBP.

But we can make an educated guess. In February 2023, BDL changed the official exchange rate from 1,500 LBP to 15,000 LBP. Measured in LBP, this change will obviously not change the LBP component of the capital account but will surely change the USD component. Given that the change in the USD component was 56.79 trillion LBP (74.23 – 17.44), then this makes the USD component equal to[1]:

56.79/(15,000 – 1,500) = 56.79/13,500 = $4.2 billion

Therefore, with the total capital account equal to $4.95 billion, then the LBP component was only $0.75 billion, making the USD component more than 5 times as much!

As interesting, in January 2024, BDL changed the official exchange rate again to 89,500 LBP. Following the same procedure and assumptions as above, the USD component of the capital account would be equal to:

236.36/(89,500 – 15,000) = 236.36/74,500 = $3.17 billion

And given that total capital was $3.49 billion, then the LBP component of the capital fell to $0.32 billion, making the USD component almost 10 times as much!

Three important conclusions can be obtained:

 First, evaluated at market rates, the capital accounts of Lebanese commercial banks fell from $20.7 billion in October 2019 to $2.88 billion USD in May 2024. Obviously, losses from the crisis, obligations to honor Circulars 158 and 166, and reductions in interest paid by BDL, all played their expected role and caused the capital accounts – that is, shareholders’ equity — to fall by more than 86%[2]. What adds ‘insult to injury’ is that early in the crisis BDL had asked Lebanese banks to increase their capital by 20%, so this effectively means that almost all the original capital (of October 2019) was mostly obliterated, and what is left now is largely the capital that banks had to raise.

Second, naturally, the drastic devaluations in the exchange rate caused the LBP component of the capital account to just about evaporate, falling to one tenth of its USD component.

Third, it is readily apparent that banks paid a heavy price for a crisis that wasn’t their making, so it is long overdue that a fair bank restructuring process is devised and implemented!

[1] That is assuming that there is no change in the capital amount itself.

[2] It is estimated that the total cost of the Circulars alone so far exceed $2.5 billion.