After enduring four and a half years of crisis, Lebanon's policymakers now seem dedicated to intensifying efforts to implement the necessary regulations for the country's recovery.

With the 2024 budget recently released amid ongoing debate and the issuance of two circulars by the Banque du Liban (BDL) to advance the unification of the exchange rate, attention has turned toward banking restructuring and addressing Lebanon's staggering $70 billion in financial losses.

Originally planned as separate proposals, the two initiatives have been consolidated into a single document, which, although intended to be confidential, was leaked to the media and social networks last Friday.

In a statement issued late on Friday by the official National News Agency (Ani), Deputy Prime Minister Saade Chami stated that the bill represented the "best possible" outcome given the challenging circumstances in the country.

Chami also emphasized that the executive was "prepared" to address any received feedback.

Commenting on the matter, Jean Riachi, CEO of I&C Bank, mentioned that the text was "fairly satisfactory" in terms of the technical aspects of restructuring, but lacked clarity regarding the distribution of losses.

Riachi expressed hope that if the draft is passed in its current form, the stringent procedures outlined for sector restructuring will provide clarity on the distribution of losses.

An unnamed bank executive expressed concern that the proposed plan unfairly imposes a heavy burden on the banking sector.

He stated, "It places excessive demands on [the bank] to cover the losses and doesn’t involve the state or BDL adequately."

However, he acknowledged that "any regulation is an improvement over the current state of affairs," a sentiment shared by BDL acting governor Wassim Manssouri during a conference in Beirut on Feb. 2.

Key Measures

The 60-page document, as seen by L’Orient-Le Jour, outlines several critical measures highlighted by Riachi.

Riachi stated that the first significant measure involves requiring foreign banks to fulfill all owed deposits without undergoing the restructuring process.

In practical terms, this means compelling banking groups headquartered abroad, for which the Lebanese market is only a small portion of their operations, to directly bear the losses associated with the Lebanese system's collapse without passing the burden to their clients.

Riachi emphasized that this measure is reasonable given the circumstances, and he believes that brands in this position would not have consented to a restructuring in Lebanon, as it effectively acknowledges bankruptcy.

However, he emphasized the need to clarify the definition of a foreign bank in the proposal in order to determine the impact on the operations of brands in Lebanon.

The second significant addition is the inclusion of the principle of the hierarchy of rights and claims, which has been a contentious topic in discussions related to this project in recent years.

"Regardless of the outcome, banks that are unable to repay the deposits they hold will go through restructuring, leading to a reduction of their capital to zero," Riachi stated.

The majority of banks will likely be unable to avoid this situation, primarily due to the losses suffered by BDL, which will only reimburse a portion of their deposits.

The proposal requires banks to ensure the gradual repayment of deposits, with up to $100,000 for depositors in one category and $36,000 for those in another.

Additionally, deposits exceeding the ‘protected’ amount will be separated and taken off banks’ balance sheets.

This measure is considered fair, as burdening banks with $90 billion in deposits would be unjust, especially while BDL significantly reduces its debt to the banks. The main goal of the proposal is to preserve as much as possible.

An ad hoc authority within BDL will have three options for addressing “unprotected” deposits.

Bail-in: This involves the conversion of a portion of deposits exceeding $500,000 into equity in the bank, where one dollar from the affected deposits is valued at a quarter of a real dollar. Therefore, depositors would need to relinquish $4 of their deposits to obtain the same number of shares as an investor injecting 1 "fresh" dollar into the bank.

Voluntary "lirification": This allows depositors to choose the conversion of a portion of deposits exceeding USD 100,000 into Lebanese lira, with the conversion rate set at only 20 percent of the market rate.

Depositors also have the option to convert the remaining balance into securities. These securities confer entitlements to a deposit restitution fund, the details of which are not clearly defined in the text.

The draft also includes a provision mandating that banks must demand public sector depositors with deposits exceeding $300,000 to provide an explanation for the source of their funds.

"While this measure may be theoretically sound, it is deemed impractical," Riachi stated. "It is challenging to imagine a scenario where a bank would feasibly allocate the resources necessary to scrutinize a potentially compromised customer, especially given the potential adverse effects that may ultimately undermine the bank’s compliance and control procedures."

The text provides leniency towards bankers who, following restructuring, inject new capital into their banks. Conversely, it casts a shadow of threat over bankers whose institutions face liquidation, as their assets could be seized and legal action taken against them.

Riachi explained, "It serves as both an incentive and a deterrent. The text urges bankers to explore all options to avoid liquidation and to reinvest some of their previous profits into the system, even if it means merging with another bank. Those anticipating a smooth handover of their banks and a peaceful retirement are now confronted with significant risks."

‘Risk Reduction’

The bill has gone through several iterations since it was first proposed in 2022 under the current government, with numerous modifications made along the way.

Chami stated that the executive branch, with support from the Banking Control Commission and BDL, was responsible for formulating the text.

At present, the central bank has not released an official statement on the contents of the draft. The interim governor previously indicated that it could be improved, suggesting that adjustments might be made during the upcoming conference.

Furthermore, there is leeway for adjustments to be made prior to its adoption and even subsequently.

The preliminary version was not slated for discussion during the cabinet's meeting on Thursday. Chami clarified in his statement that the draft had not been included in the executive's agenda.

He then delineated the bill's objectives, encompassing the "protection of legitimate deposits," "strengthening of financial stability," and "rehabilitation of the banking sector to enable it to fulfill its role in financing the private sector and citizens."

The primary aim is to "foster growth" while taking into account the "sustainability of public debt and the continuity of public services," all the while "mitigating systemic risks within the Lebanese financial sector."

Chami stressed that the ultimate goal is to reduce the country's dependence on cash transactions, potentially straining relationships between Lebanon's banking sector and international financial institutions. These objectives are detailed in Article 3 of the legislation.

A banking executive, speaking anonymously, expressed concerns that the proposed measures will discourage potential investors from engaging with the banks. He noted, "The suggested actions are expected to leave a lasting mark on bank revenues."