Following the adoption of the draft law for reforming and reorganizing the banking sector in Lebanon, the government will begin preparing a law to address the financial gap, intended to restore financial system stability. However, the implementation of the banking reform and reorganization bill is suspended until the law on the financial gap is passed, as the latter is deemed a prerequisite for restoring balance to the financial system.
This proposed law raises many questions, notably: How can we talk about restructuring banks before determining the extent of losses, debts and responsibilities and, most importantly, the obligations of the state and the Central Bank (Banque du Liban) toward the banks—before even evaluating them?
An examination of the draft law reveals several issues across its articles, which include legal loopholes, ambiguous interpretations and certain measures that, if implemented, could further damage the banking sector rather than reform it.
- Article 3 of the draft law states that one of the objectives is to minimize the use of public funds in bank restructuring. Does this not indirectly imply that the state refuses to bear any part of the financial losses it contributed to, ultimately leading to the elimination of deposits and contradicting rulings by the State Council?
- The law proposes the formation of a High Banking Authority responsible for reform, composed of seven members: the governor of the Central Bank, one deputy governor, the head of the Banking Control Commission, a legal expert, two financial/banking/auditing experts and the head of the National Deposit Guarantee Institution. No bank representatives are included. Is it logical that banks are excluded from the very body responsible for restructuring their sector?
- The Banking Control Commission is assigned to assess each bank’s financial situation, evaluate net asset value and losses and submit these findings to the High Authority, which would then decide whether to restructure, recapitalize or liquidate the bank. After legal amendments, the bank in question is allowed to appeal to the courts, as is standard globally. However, the appeal does not suspend execution, and the law doesn’t even include a clause like "unless otherwise decided by the court," which would allow a judge to stop an unfair decision. As a result, a bank could be forced to comply before the court overturns the ruling—rendering the appeal meaningless.
- Expanding the role of the Banking Control Commission is also concerning: it acts simultaneously as a party, judge and decision-maker, involved in evaluation, oversight and decision-making as a member of the High Authority.
- Meanwhile, the state has defaulted on its obligations and owes money to the Central Bank—money that includes bank deposits, which are actually depositors’ funds. Yet it is also playing the role of judge in determining the fate of the banks. How can there be justice when the judge is also part of the crisis?
- The law goes even further by expanding the powers of the temporary administrator, who can be appointed by the High Banking Authority. This administrator is granted unrestricted control over the bank’s assets and has the power to dismiss bank executives without just cause. Is that reasonable?
- Even without a court ruling, the law grants the High Authority the right to seize the personal assets of bank officials simply on suspicion of civil or criminal offenses. But the real question is: Did banks actually commit a crime by placing deposits with the Central Bank or investing in Treasury bonds issued by the Lebanese state?
- Article 13 outlines tools for bank restructuring, such as internal bail-ins, capital write-downs, recapitalization via new investors, mergers, transfers of ownership or certain assets and liabilities to another entity. However, it also introduces a provision for the Central Bank to inject capital into a struggling bank. It is worth recalling the Intra Bank crisis, and the role of the then-High Banking Authority, when the state paid nearly 155 million Lebanese pounds to 17 banks to save them. That precedent should not be forgotten.
In conclusion, this draft law holds the banks and their owners responsible for the state’s failure to pay, which deters investors, undermines reform efforts and blocks the sector’s recovery—quite the opposite of what is needed.
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