Is the Banking Sector in Lebanon Salvageable?

Abstract

The financial crisis in Lebanon was the result of deep-rooted structural problems that had been identified for many years. The government default—combined with an insolvent central bank—resulted in the commercial banking sector having a massive $72 billion hole because of its large exposure to these two entities. Reaching an agreement on bank restructuring and loss allocation is crucial for laying the foundations for sustainable growth and it is a condition for a much-needed IMF program. The political impasse has centered on this very issue, with competing proposals from multiple policymakers, stakeholders and independent bodies. This paper looks at possibilities for bank restructuring in Lebanon, drawing upon the standards set by the Financial Stability Board (FSB) and the Basel Committee on Bank Supervision (BCBS), particularly the Total Loss Absorption Capacity (TLAC) and Basel III requirements. It finds that under realistic market conditions, only a few banks would be financially viable without a massive injection of capital or a sharp reduction in liabilities. This conclusion is based on a bank-by-bank solvency assessment for 21 representative banks. A bail-in involving the conversion of deposits into equity could be part of the solution for restructuring banks. Encouragingly, a recovery of up to $100,000 per depositor appears feasible. The paper is organized as follows: The first section explains the peculiarity of the Lebanese banking crisis vis-à-vis other historical crises; the second section surveys the regulatory toolkit typically used in bank restructuring; and the third section reviews the numerous recovery plans that have been proposed for Lebanon, with particular emphasis on bank restructuring. The fourth section assesses the viability of each bank under multiple restructuring scenarios and quantifying the fiscal cost of a deposit recovery fund should banks not manage to meet their obligations.