Under the supervision of the International Monetary Fund, the government is working to complete the project to address the financial gap before the end of this year. The past few days have witnessed a series of intensive meetings between the government team and IMF experts to reach a final formula for the project, which will soon be presented to the Council of Ministers. Despite the absence of an official text or specific document that defines how losses and responsibilities will be distributed between the state, the Bank of Lebanon, and the banks, the leaks and media reports that dealt with the IMF’s observations on the draft during the technical meetings were enough to stir controversy among the banks. This is mainly due to the IMF’s insistence on adopting the principle of hierarchy of rights and claims when distributing losses, which means exhausting the bank’s capital, i.e., the contributions of its owners, before imposing any losses on any other party.
Banks: The state places full responsibility on the banks
In this context, a delegation from the Association of Banks visited Prime Minister Najib Mikati last Wednesday, and the Prime Minister’s Office issued a statement in which Mikati affirmed that “banks must be a key partner in rebuilding confidence in the country’s economy.” Prior to this meeting, the association recorded its observations on the leaked version of the project, considering in a statement that “the project has flaws and includes provisions that would undermine the banking system” and that “it is unacceptable for the state to evade its responsibilities and place them on the banks, causing the liquidation of the sector and the elimination of depositors’ right to recover their deposits.”
Ghabril: The crisis is the result of misuse of power
Economic researcher and financial and banking expert Dr. Nassib Ghobril explained that responsibility for the crisis should be distributed among the state, the Bank of Lebanon, and commercial banks, and not be entirely borne by the banks alone. He stated in a statement to “Lebanon 24” that the circulating version exempts the state and the Bank of Lebanon from any direct obligation to provide liquidity, while placing the entire burden on the banks. He pointed out that the liquidity of commercial banks with correspondent banks amounts to about $5.2 billion, and no more than $3.2 billion of it can be used due to the need to cover “fresh” accounts. In contrast, the Bank of Lebanon possesses approximately $11.9 billion in foreign currency reserves, of which 800 million is for the public sector, while the remainder, i.e., $11.1 billion, is a mandatory reserve that belongs to depositors. By combining these two figures, the available liquidity reaches approximately $17 billion, compared to obligations ranging between $22 and $25 billion over four years according to the financial gap project, which raises questions about the ability of banks alone to restore deposits.
Ghobril emphasizes the need for the state to contribute to restoring depositors’ rights, considering that the essence of the crisis is not technical, but rather the result of misuse of political power and mismanagement of public institutions, which led to a crisis of confidence that began in 2018 and turned during 2019 into a liquidity crisis, with the loss of confidence and the rush of depositors to withdraw their money, which no banking system in the world can withstand at once.
Fahili: Refutes the IMF’s observations… Doubts about the ability to fulfill medium and large deposits
Banking risk expert Dr. Mohamad Faheli pointed out that the controversial point regarding the hierarchy of rights is the most sensitive, and means bearing losses according to a legal sequence that begins with capital and shareholders before creditors, including depositors. The IMF believes that any text that imposes losses on deposits before exhausting shareholders’ capital violates this rule. Faheli added that any law that appears to protect shareholders or reproduce privileges will not be socially acceptable, and will not stand legally if it violates the principles of bankruptcy “And in Lebanon, where the responsibilities of banks, the state, and the central bank are intertwined, respecting the hierarchy is a condition for justice, before it is a technical requirement of the IMF.”
The project divides deposits formed before 2019 into four categories: small less than $100,000, medium between $100,000 and $1 million, large from $1 million to $5 million, and very large exceeding $5 million. A value of up to $100,000 is paid in cash to all categories in four equal annual installments, while the remaining balance is converted into tradable financial bonds with a non-compounded interest rate of 2% per year, with maturities extending to 10 years for medium deposits, 15 years for large deposits, and 20 years for very large deposits.
During his review of the IMF’s observations, Faheli points out that the sustainability knot lies in the actual ability to service obligations towards medium and large deposits, if managed through long-term repayment instruments, and in the availability of real cash flows that make the obligations enforceable. He emphasizes that these flows are only achieved through documented profits, actual capitalization that injects new funds, not accounting restrictions, and transparent asset management within strict governance, along with real economic growth. Without that, long-term instruments become a means of postponing losses, nothing more.
What about the capitalization of the Bank of Lebanon?
A fundamental question arises from the concept of sustainability about the fate of non-viable banks, and in this context, Faheli pointed to the Fund’s demand for a clear text that defines the protection of depositors and the cost of liquidation, because the absence of rules turns it from a financial procedure into social and judicial chaos. At the heart of the discussion, Faheli draws attention to the issue of capitalizing the Bank of Lebanon “where it is reported that the Fund does not see sufficient guarantees to restore it even to zero, nor to secure revenues to cover its expenses and maintain its reserves, in a way that allows it to perform its role and not turn into part of the crisis. Related to this is the controversy surrounding the state’s debt to the central bank, the extent of its recognition of it, and its impact on depositors’ rights and the sustainability of public finances.
Faheli concludes by pointing out that all of these points push the discussion from generalities to accountable rules, and raise a fundamental question: Will a law be written that protects justice and does not burden depositors with losses before those responsible for them? Or will turning these headings into slogans without applicable texts only lead to a repeat of failure?”
In conclusion, the financial gap law goes beyond being a technical procedure to become a founding document that lays the foundations for restructuring the entire financial system, and opens the door to a new phase based on restoring depositors’ confidence and establishing strict governance. Therefore, a clear approach is required that defines responsibilities according to a fair hierarchy, and provides the conditions for the actual sustainability of restoring deposits, otherwise the same crisis will be reproduced in a deferred legal form.
