“Lebanon Debate”
A study prepared by the global consulting company “Ancora” puts the draft financial regulation and deposit recovery law to a very serious test, after it concluded that only 6 banks may remain able to complete the payment of their share of the $100,000 promised to depositors, if the current mechanism is applied over a period of 4 years.
The study, prepared for the Association of Banks in Lebanon, was based on information provided by 25 banking institutions representing about 92% of the sector, before the results were circulated to the entire sector. It studied the actual ability of banks to provide the required liquidity, not just the theoretical obligations imposed on them by the draft law.
According to the basic scenario whose results the study simulated, only 10 banks can bear the payments during the first year, before the number declines to 8 in the second year, and 7 in the third year, reaching only 6 banks in the fourth year, including 4 large banks.
This means, according to Ancora’s estimates, that about 550,000 depositors may be at risk of not completing the recovery of their money, while the net value of outstanding deposits with banks that may be unable to continue paying is about $29.1 billion.
The numbers show that the total bank deposits involved in the study amount to approximately $82.8 billion, of which $15.1 billion are in accounts not exceeding $100,000, and 37.3 billion are in accounts ranging between $100,000 and $1 million, while the rest of the deposits are distributed among the larger accounts.
The study estimates the direct cash burden placed on banks during the first four years at about $9.2 billion, as a result of them bearing 40% of the cost of repaying the cash tranche, compared to 60% on the Bank of Lebanon. It warns that most banks do not have sufficient liquidity to implement this commitment, especially since they are forced to sell illiquid assets at discounted prices.
The problem does not stop with banks faltering, as the study indicates that liquidating any bank that is unable to fulfill its obligations may leave its depositors at risk of losing an additional portion of their money, instead of guaranteeing them the recovery of the first 100,000 dollars as the law promises them.
But “Ancora” proposed another scenario that fundamentally changes the results, which is based on calculating the mandatory reserves estimated at about $10.7 billion within the banks’ share, and deducting the amounts previously paid under Circulars 158 and 166. Then, the number of banks able to continue paying throughout the four years increases to 23 out of 25 banks included in the data, and the number of threatened depositors decreases to about 25 thousand.
The study recommended that the state recognize its obligations towards the Bank of Lebanon, and address its responsibility stipulated in Article 113 of the Monetary and Credit Law, in addition to using part of the gold reserve to provide the necessary liquidity, calculating mandatory reserves within the mechanism for distributing losses, and preventing duplication in calculating payments previously obtained by depositors.
It also warned that approving the law in its studied form could weaken the banking sector and eliminate its ability to finance the economy, thus destroying the monetary economy and delaying recovery, instead of restoring confidence and ensuring the recovery of deposits.
Ancora’s results remain estimates and are not a final accounting judgment, as the company clarifies that its information is not fully audited and that the scenarios are subject to modification. However, the study reveals where the real danger lies: the legal promise to pay $100,000 is not enough, unless the banks charged with paying have the liquidity that allows them to implement it.
To view the full “Ancora” study on the draft financial regulation and deposit recovery law, please visit: Click here.
