As Lebanon’s banking sector struggles to cope with an ongoing financial crisis, the absence of a comprehensive restructuring plan is exacerbating the situation. With each passing day, the sector's remaining liquidity is further depleted, leaving depositors vulnerable to losses. Time, rather than offering a reprieve, is only serving to erode more of the banks' ability to protect what remains of depositors' funds.

Without a clear restructuring roadmap, Lebanon’s banks continue to face mounting challenges. Depositors are enduring significant losses, either through the sale of checks at lower values or through withdrawals at unfavorable exchange rates. Meanwhile, the Central Bank’s policy of dividing installment payments for small depositors across extended periods of time serves to mask the ongoing erosion of their purchasing power, as inflation in both global and local markets continues to undermine the value of these funds.

At the start of this year, a brief overview of Lebanon’s banking sector provides a snapshot of its dire financial condition, especially considering the rapid changes that have unfolded over the past several years.

Liquidity Situation in the Banking Sector

From a practical standpoint, the sector's liquidity can be categorized into two main segments: the funds deposited by Lebanese banks with correspondent banks abroad, and the reserves that banks have lodged with the Central Bank of Lebanon. Central Bank circulars stipulate that the cost of traditional monthly withdrawals in foreign currencies is to be shared equally by exporters, except for exceptional and additional withdrawals, which are fully covered by the Central Bank’s reserves.

According to the latest consolidated financial statements, Lebanese banks are starting 2025 with approximately $4.15 billion in liquidity deposited with foreign correspondent banks. This figure has seen only a modest increase of about 1% from the same period last year, a far cry from the $8.5 billion liquidity that stood at the beginning of 2020, before the financial crisis took hold.

In contrast to the liquidity in foreign correspondent banks, Lebanese banks owe external liabilities totaling $2.52 billion, which must be deducted from the total liquidity to determine the net reserves available abroad. Based on this, it can be concluded that the net reserves held by Lebanese banks abroad now amount to approximately $1.63 billion, which can be used to meet obligations in the short term without jeopardizing their ability to honor external debts. This figure reflects a decrease in liabilities of 16.44% last year, a result of Lebanese banks paying off some of their foreign obligations using liquidity that was previously held abroad.

As for the reserves of the Central Bank of Lebanon, the most recent figures indicate that the liquidity held by Lebanese banks at the Central Bank has reached $10.18 billion. This result, reported in mid-December, follows fluctuations in the Central Bank’s reserve levels throughout 2024, due to its policy of purchasing dollars from the market and the depletion of reserves by the ongoing war.

In total, the liquidity available for use across the Central Bank and foreign correspondent banks stands at approximately $11.81 billion, after accounting for external banking obligations. This figure represents the margin that could potentially be safeguarded for foreign-currency depositors in the context of any potential restructuring of Lebanon’s banking sector. The restructuring process, as per the latest government draft, may also involve repayment of some large local-currency deposits, at varying exchange rates.

Deposit Situation

In contrast to the remaining foreign-currency assets, the Lebanese banking sector is still burdened with approximately $87.73 billion in foreign-currency deposits, including around $3 billion in “fresh” deposits. When adding deposits in Lebanese pounds, the total value of all deposits is estimated at around $88.39 billion.

For context, in July 2019, just before the onset of Lebanon’s financial collapse, the private sector’s deposits were approaching $172.35 billion. This indicates that nearly half of the sector’s deposits have been eroded since that time, either through the sale of checks, loan repayments, or gradual withdrawals in both dollars and Lebanese pounds. The vast majority of these operations have led to losses for depositors, as their funds have been accessed at values lower than their original worth. At the same time, a key factor in the decline of deposit values has been the depreciation of the Lebanese pound, which has caused the value of deposits in local currency to plunge.

To further highlight the scale of the banking sector's crisis, the total volume of Lebanese banks' investments in the Central Bank still stands at approximately $80.64 billion, representing roughly 91.23% of the total value of deposits in the sector. This massive figure, when compared with the limited reserves remaining in the Central Bank, illustrates the gravity of Lebanon’s liquidity crisis. Additionally, investments in foreign-currency sovereign debt (Eurobonds), which are due directly from the Lebanese government, amount to only $2.31 billion, a significant decrease from the levels prior to the crisis as banks have gradually liquidated their Eurobond holdings.

Growing Losses for Depositors

The widening gap between the banking sector’s remaining liquidity and its obligations is becoming increasingly evident. As the crisis deepens, it is clear that depositors will bear even more significant losses if a restructuring plan is not initiated soon. If the sector continues down its current path, depositors will face even greater financial losses in the future, just as they have experienced in the past few years.

A failure to begin restructuring the banking sector in 2025 would only further exacerbate these losses, and depositors would likely continue to feel the repercussions of the ongoing crisis. The Lebanese banking sector’s struggle to regain its footing continues, with no clear solution in sight, and the outlook for depositors remains bleak.