Lebanon’s Cabinet approved on Tuesday the statement of justification for the draft law on the reorganization of banks, with a follow-up session scheduled for Friday to finalize the text. The initiative is framed by two core principles the government says it upholds: safeguarding depositors’ rights and revitalizing the banking sector so it can resume its lending role and support economic recovery and growth.
The push to pass this legislation – alongside recent amendments to the Banking Secrecy Law – is part of a broader effort to meet key conditions set by the International Monetary Fund (IMF) ahead of the Lebanese delegation’s participation in the IMF Spring Meetings on April 21 in Washington, D.C.
At this stage, the government appears primarily focused on demonstrating progress to the IMF in hopes of securing a long-delayed financial rescue package. In a recent meeting with Finance Minister Yassine Jaber, IMF Mission Chief Ernesto Ramirez Rigo and Resident Representative Frederico Lima were direct: “Lebanon must pass the required laws before its delegation meets senior IMF officials in Washington if it wants to advance negotiations on a formal support program.”
Consequently, the government is expediting the passage of the Bank Reorganization Law, following its approval of the amended Banking Secrecy Law, which has already been sent to Parliament. Next, it plans to focus on enacting a law to address the substantial financial gap.
While the government has endorsed the reasons for the draft Bank Reorganization Law, several critical observations can be made regarding the proposal, particularly with respect to the justifications themselves, which were also endorsed by the government.
The accompanying justifications for the proposed law present an unsettling view: the draft appears largely disconnected from the realities of the ongoing crisis in most of its provisions. The true justification for its approval and enactment lies in completing the Bank Resolution Law rather than addressing the immediate financial crisis resulting from the massive fiscal gap. These justifications fail to fully consider the broader repercussions of the crisis, nor do they account for the laws that will eventually be needed to manage its aftermath. Furthermore, there is a strong likelihood that several provisions within the law will require amendments once the “Financial System Stabilization Law” and the “Banking Withdrawal Regulation Law,” – both stalled since October 17, 2019 – are passed.
In theory, as stated in the justifications and rationale provided, it may be appropriate to propose a law that addresses the conditions of a single bank or a limited number of banks under normal circumstances, especially in the case of a routine failure. Such a law would regulate the status of these banks and classify them as a preliminary step toward resuming their operations, followed by measures such as mergers, liquidation or write-offs.
However, the current situation, stemming from a “systemic crisis,” involves the complete collapse of the financial and monetary systems. The primary causes of this crisis include government policies, public debt, and a triple deficit in the national budget, the balance of payments and the trade balance.
In practical terms, the application of the proposed law would likely result in the liquidation of most banks. Moreover, it would hold those responsible for the ownership and management of these banks over the past decade accountable for how they managed and sequestered assets. How can the “distribution of losses” or liabilities be separated between the state and the Central Bank (BDL) when addressing the conditions of the banks? Furthermore, how can the valuation of banks be accurately determined if there is no established framework to handle the functions of BDL and its sovereign bonds?
In addition to the points raised earlier, it is important to highlight that the proposed law cannot fully address the issues outlined in the “Financial System Restructuring Law,” particularly regarding the extent to which banks will bear the burden of the state’s and BDL’s defaults. The bill’s responsibility framework should explicitly exempt banks from liability for any failures that result from implementing the restructuring law.
This is crucial to protect the banks from potential legal consequences, especially given that the proposed law already places some level of responsibility on them, holding management accountable for operational failures. This becomes more significant as banks may have already incurred losses due to the state’s and BDL’s default, affecting both their reputation and, potentially, their institutions.
Thus, it is only fair for the bill to clearly state that the current banking crisis is a “systemic crisis,” and that bank managers should be exempt from liability, except in cases of proven professional misconduct. While Article 40 of the bill mentions the handling of “bank assets held at the Central Bank, as well as investments in Eurobonds,” a more effective approach would be to consolidate the response into a single, cohesive law that combines both bank reform and financial system restructuring.
Furthermore, it is essential to stress that liquidity and solvency assessments should be based on the assumption that deposits or funds held by banks at BDL are not considered losses. Therefore, corresponding deposits for individuals should not be classified as losses either.
Comments