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A crisis that hit three banks prompted the relevant authorities in the United States to take swift action to avoid any potential contagion that could jeopardize the entire American financial system.

Similarly, in Switzerland, the Credit Suisse crisis prompted the relevant authorities to hold open meetings throughout the weekend until they were confident that the crisis had been properly addressed and the situation contained before the markets reopened early the following week.

In Lebanon, while the crisis has been recognized by the International Monetary Fund (IMF) as unprecedented in its severity, and while we find ourselves in a constitutional vacuum, we continue with our daily lives as if nothing happened. We have proven that we are the only country in the world capable of enduring prolonged periods of presidential vacuum, seamlessly unaffected.

Over the course of 43 months, depositors have lost $51 billion of their deposits, at a time when it takes the government forever to debate bills, withdraw them, formulate new ones, and finally proceed to passing them — only to the dismay of the IMF, which turns out to be dissatisfied with such laws.

Since October 17, 2019, nearly $51 billion of value to depositors have been squandered through the repayment of loans and the depletion of dollar reserves at the Banque du Liban (BDL).

At the beginning of the crisis, the BDL’s balance sheet showed $31 billion (or equivalent in other currencies) in assets. Of this total, $22 billion has been spent to date. If this amount had been returned to depositors during this period, most of the accounts would have been reimbursed and hundreds of thousands of depositors would have received their rightful funds.

However, the authorities preferred to trade the Lebanese economy for one that resembles a communist economy. Worse still, the state did not even respect the communist concepts, as most of what has been squandered either benefited a few influential opportunists, instead of the people, or was transferred abroad.

These $31 billion accounted for 25% of $124 billion, the total foreign currency deposits in commercial banks as of October 15, 2019. Today, the remaining $9 billion in the balance sheet of the BDL only account for 10% of $94 billion, which is the current level of foreign currency deposits in commercial banks.

In addition, these mandatory reserves currently account for only 10% of deposits, failing to meet the regulatory threshold of 14%. This decrease occurred without explanation, justification, or even a circular to give a legal basis for this decline.

There are even rumors that there is a desire to grant four new banking licenses for entities that would be exclusively dealing in fresh dollars, for both deposits or credits. In other words, the aim is to create a new banking sector that would replace the existing banking sector along with its deposits.

If the banking activity shifts to a new sector created from scratch, the current banks would not be able to participate in the resolution of the crisis unless they have sufficient resources to sustain their operations.

It is challenging for the BDL to withstand the pressures associated with financing the state’s foreign currency requirements and curbing the exchange rate in such a “systemic crisis,” but banks concerned about the fate of their deposits with the BDL must also bear in mind that they have sent an official note to the BDL on March 31, 2021, and April 4, 2022, emphasizing the need to preserve the reserve requirements.

The banks even argued that BDL should not tamper with the deposits of banks but fully safeguard them. The central bank replied that it can repay such deposits in Lebanese pounds based on the current exchange rate — an arrangement deemed unacceptable to the Association of Banks that wants to return these deposits in the same currency.

The banking sector is currently under significant strain during a transitional period compounded by a presidential and legislative vacuum that further delays potential solutions. It is high time to address the causes as well as the consequences. It is high time to accompany the restructuring of the banking sector with a comprehensive effort to combat corruption and clientelism within the government so that successive governments stop squandering the remainder of the depositors’ money. Failure to do so will perpetuate this problematic situation.

(*) Dr. Fady Khalaf is the Secretary General of the Association of Banks in Lebanon