Amid Lebanon’s enduring banking crisis, the government has proposed a bank resolution plan to address the escalating challenges that began in 2019. The plan entails the establishment of a restructuring committee tasked with evaluating which banks should undergo liquidation and which ones should undergo restructuring. The restructuring measures encompass various strategies such as depositor bail-ins, bank recapitalization, potential mergers and acquisitions, appointment of interim directors, alterations in capital structures, adjustments to deposit terms and interest rates, among other measures.

Under the proposed plan, restructured banks would reimburse depositors up to $100,000 each over a period of 10 to 15 years, while imposing an 80-90% haircut on amounts exceeding this threshold. This haircut would be facilitated through a bail-in mechanism, lirafication of dollar-denominated deposits, and the conversion of deposits into shares in a depositor recovery fund. This move is expected to enable both the central bank and banks to address the $70 billion losses.

LIMS highlighted that implementing a comprehensive bank resolution framework has long been overdue, with the crisis surfacing four years ago. The delay has led to substantial losses in central bank reserves, plunging from $35 billion to a mere $8 billion, significantly limiting the potential payout to depositors. Moreover, LIMS emphasized that while the proposed plan requests Lebanese citizens to accept substantial haircuts on their deposits, it falls short in offering meaningful reforms in return. It is necessary to incorporate tangible reforms within the framework to prevent a recurrence of the practices that contributed to the crisis. Key reforms include: (1) banning banks from placing deposits with the central bank to mitigate Ponzi scheme-like practices, (2) prohibiting the central bank from lending to the government, a major contributor to financial sector losses, and (3) imposing limits on the central bank’s ability to increase the supply of Lebanese pounds unless fully backed by US dollar reserves at a fixed exchange rate.

Implementing these critical reforms holds the potential to rebuild trust within Lebanon’s banking sector and plays a pivotal role in regaining the confidence of Lebanese expatriates, who represent a considerable assets for the country’s future.

• Restructuring the Lebanese Banking Sector: Solutions And Challenges, February 28, 2024: NBN, TV Interview AR