'Fix It Or Exit': The Stark Situation Facing Lebanese Banks

Long renowned for being one of the best banking systems in the world and resilient to crises, the moment of truth has arrived in Lebanon.

If Lebanese banks fail to increase their capital by 20 percent by the end of February 2021 they have to exit the market, according to Central Bank governor Riad Salameh.

Sounding the “fix it or exit” alarm, he said he could not speculate how many banks would exit the market. Those leaving would do so by giving their shares to the central bank and deposits would be preserved because there would be no "bankruptcy situation”, he added.

Salameh’s warning came after the central bank issued a series of circulars asking banks to boost capital and offer clients securities in return for their deposits, as part of moves to revive the banking sector, which has been crippled by the financial meltdown.

It is a far cry from 2011 when six Lebanese banks were named among the top 10 strongest commercial banks in the Middle East.

The central bank said lenders should urge clients who transferred at least $500,000 abroad from July 2017 until now to deposit 15 percent of the amount for five years within Lebanon. Politically exposed persons (PEP) should deposit 30 percent of the amount transferred, in order to boost liquidity, it said.

Officials have in the past accused bankers of transferring billions of dollars outside Lebanon to evade capital controls and protect their money during the crisis.

“The circulars issued by the Central Bank are important steps to improve the liquidity, solvency, capital adequacy and governance of the banking system to help reinforce the overall financial standing of banks and regain the overall confidence factor with time.”, Marwan Barkat, group chief economist and head of research of Bank Audi told Arabian Business.

But he added: “This has yet to be accompanied with strict adjustment measures on behalf of the State to adjust its public finances, which remain the main vulnerability of the country’s economy and its financial system.”

As the Central Bank of Lebanon predicted losses of 45 percent in the holdings of Treasury bonds in foreign currency, the local banks were informed to set aside provisions for a loss of 1.89 percent on their hard currency deposits with the Central Bank, with maturities of less than a year, without accounting for losses on their holdings of certificates of deposit in Lebanese pounds.

The banks have a five-year period to set aside the provisions, which could be extended to ten years, subject to the approval of the Central Bank.

It seems the old Lebanese banking system relying on overseas dollars and paying higher interest rates to attract funds is over, but the new system is yet to be drafted.