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The November 2023 issue analysed the origins of the Lebanese banking failure and the competing approaches to restructuring. The authors described an overbanked sector of more than 60 banks performing near-identical deposit-gathering activities, with heavily dollarised balance sheets, severe maturity and currency mismatches, thin capitalisation, undiversified revenues and lending skewed to retail consumption, while the bulk of liquidity funded the state through government securities and the central bank.
The issue contrasted the IMF's emphasis on debt restructuring, governance and alignment with international standards with the banking association's plan, which sought to preserve bank capital, rely on state assets and attract local equity investors, a proposal the authors considered unrealistic. Their central criticism was that neither approach gave depositors priority in recovering their savings.
As an alternative, the issue proposed a reform agenda resting on governance and transparency, depositor protection, decentralised financial decision-making and an overhaul of bank management, supported by a pre-reform assessment of capital adequacy, risk, liquidity and concentration across all banks.
Key findings
- At end-2017, government securities and central bank placements made up 66.6% of consolidated bank assets, against 29.4% for loans.
- More than 40% of consolidated sector assets were concentrated with the central bank, despite the concentration limits it imposed on individual banks.
- Estimates of the loss gap at the time ranged from $70 billion according to banks and $55 billion according to the central bank to zero according to the government.
- Combined bank capital of about $20 billion compared with around $90 billion of deposits, while lost deposits were estimated at $120 billion.
- Recommendations included a depositor compensation scheme, a diversified oversight body to reduce central bank concentration of power, and barring politically interested persons from bank boards and equity.
Archive: written in Nov 2023; figures and assessments reflect conditions at the time of writing.Summary of the paper; the full analysis is in the PDF.