Uploaded on
Published in May 2023, issue 16 of the Orion Financial Solutions Investment Contextual Report addressed a problem specific to Lebanon at the time: how to rate banks in a country in selective default. With most banks technically insolvent, non-compliant with capital and liquidity requirements and without a credible plan to rebuild depositor confidence, the paper argued that standard bank-rating methodologies had become close to meaningless, and that international agencies had been slow to downgrade despite clear warning signs.
Its central concern was the sovereign ceiling. Treating every bank at the sovereign's rating, the paper argued, conceals those that are better capitalised. It proposed an adjusted methodology layered on the conventional qualitative and quantitative framework, designed to differentiate and rank banks domestically and relative to correspondent banks, and to support the sector-wide mergers and acquisitions that restructuring would require. The paper also reviewed bond notching and the role of rating agencies in reducing information asymmetry during a crisis.
For depositors, investors and regulators, the paper's message was that ratings remained essential to rebuilding trust, provided they reflected the country's specific economic and political risks and were backed by stronger disclosure and supervision.
Key findings
- Banks had not complied with the central bank's capitalisation mandate or with the required 3% liquidity reserve placed with correspondent banks.
- The paper noted that the qualitative component accounts subjectively for 60% of a conventional bank rating decision, and that the domestic minimum capital adequacy ratio was 12% against an 8% international minimum.
- The adjusted methodology adds stress tests for exchange-rate volatility, de-risking, the cash economy and bank resizing, as well as reviews of foreign-currency support and staff retention.
- It recommended that ratings covering corporate governance and risk mitigation be made compulsory for any financial sector emerging from restructuring.
- It called on the Capital Markets Authority to establish a legislative framework for local rating agencies, as most MENA countries had already done.
Archive: written in May 2023; figures and assessments reflect conditions at the time of writing.Summary of the paper; the full analysis is in the PDF.