Listen to the article

The banking crisis began quietly, just before the October 17 uprising. It then worsened month after month due to depositors’ rush to withdraw their deposits and the uselessness of public authorities which exhibited a unique blend of incompetence and a deliberate intention to break the sector. It’s a textbook case taught in the newly introduced university course on the “ultimate stage of economic stupidity.” It’s worth mentioning that Hassan Diab was in charge, with the Berri-affiliated Ghazi Wazni in charge of finance. That’s a starting point, but we won’t dwell on it.  

Let’s instead see what the financial data for this vital sector now shows and present it along with the necessary explanations, as almost everyone seems to have lost their minds, for good reason. We apologize for the overwhelming amount of tedious numbers, but we’ll do our best to make them somewhat digestible.

A small note before we dive in: The numbers are supposed to cover a four-year period from September 2019 to September 2023, with occasional one- or two-month delays depending on their availability, which doesn’t change the overall trend. Another note: most of the banking operations below were imposed by authorities, to the detriment of banks and depositors.

  • Equity: It plummeted from $21 billion to $6.5 billion. There are two explanations for this: first, some capital was originally in Lebanese pounds (LBP), and with the official exchange rate dropping to 15,000 LBP, the capital value in dollars followed suit. Second, the capital was eroded by annual losses and the necessary provisions for loans.
  • USD deposits: A decrease from $124 billion to $92 billion. How did these $32 billion disappear? There are four main causes, listed in descending order of importance.

The first is that they were used to pay off loans. This early repayment accounts for 62% of the deposit contraction.

The second is that at the start of the crisis, people used USD deposits to buy real estate and other assets with lollars (bank checks).

The third reason is that deposits locked in the bank were sacrificed in exchange for cash, with a discount that kept increasing, currently reaching 85%. The process is now known by all: a depositor agrees with their bank to cash $15,000 in exchange for deducting $100,000 from their account. This operation, later banned by the Central Bank (BDL), continues among private actors.

The fourth reason is cash withdrawals, which were initially limited in banks before the BDL unified the process with Circulars 151 and 158.

The last involves transfers abroad: some were justified as transfers for students or other emergencies, but other deposits came from correspondent banks that had to be served to avoid isolation from the international financial system. Finally, a smaller portion, despite what many depositors believe, was transferred to a few privileged individuals, amounting to USD 2 or 3 billion according to sources.

  • Loans in LBP: These nearly halved, from 24 trillion to 13 trillion, due to early repayment. For example, a household that had taken out a mortgage of 200 million LBP with a monthly installment of 1.5 million LBP (equivalent to $1,000 at the time) hit the jackpot. With the currency’s decline, these 1.5 million LBP monthly payments were worth only $100 two years later and $15 four years later. The astounding result: a household that acquired its property in 2017 or 2018 essentially got it for free.
  • Loans in USD: Another significant drop, from $38 billion to $8 billion. As mentioned earlier, this was initially achieved through repayment using USD deposits (in lollars), then by cash swap: $15,000 in cash to extinguish $100,000 of debt. It was even possible to repay loans in LBP at an exchange rate of 1,500 LBP during the early years of the crisis.

An ongoing bill in Parliament aims to tax those who repaid their loans at a low cost. However, the text excludes individual borrowers of less than $100,000 (or the equivalent in LBP at the original rate), including real estate (mortgages) and consumer loans. This significantly diminishes its utility. The more we succumb to populism, the more absurd it becomes. It’s mathematical.

  • Foreign liquidity: An important indicator measuring banks’ strength. In four years, this liquidity deposited in foreign banks dropped from $8.4 billion to $4.4 billion, with an additional $900 million currently in local bank vaults. This decline was due to payments under Circular 158, more generous withdrawals at the start of the crisis, and other transfers as listed above.
  • Eurobonds: Another drop, from $15 billion to $2.7 billion. Banks had to sell most of these bonds abroad at a loss in the early months of the crisis. Additionally, according to the BDL, banks should set aside provisions equal to 75% of their nominal value.

In summary, following this overview, are banks viable or not? It certainly depends on each bank. But first, it’s safe to say that they have a liquidity problem. Most likely, they also have an insolvency problem because, based on current data, their assets do not cover their liabilities. This is why the former governor asked them to rebuild their capital over five years.

There is a question among depositors: why not declare their bankruptcy then? To be completely transparent, a few rare banks considered it and even submitted a request to the BDL, which was rejected by the former governor.

In reality, this would have been the most advantageous solution for the bankers: they are already wealthy and could get rid of all their worries. If most of them don’t do it, it’s likely due to attachment to a heritage built over generations.

However, it would be the worst solution for depositors, as they would lose any chance of recovery. Yet there are still a few deluded individuals demanding it.