Among the meetings held by the International Monetary Fund (IMF) delegation visiting Lebanon last week, one organized discreetly by five major banks — Bank Audi, Bank Med, BLOM Bank, BLF and Byblos Bank — caused a certain amount of commotion.

The purpose of the meeting was to persuade the banks to accept the latest version of the government's plan to restructure the banking sector, which involves a commitment to return $100,000 to each depositor under certain conditions.

However, after certain meeting contents were leaked to the Lebanese press, other banks, particularly those perceived as the “toughest” since the start of the crisis, accused the participants of fracturing the sector’s unity.

They alleged, albeit erroneously, that accepting a guaranteed minimum repayment of $100,000 would result in canceled remaining deposits.

This controversy, which sparked public outrage, overshadowed the main issue of the meeting.

The sector’s representatives firmly reiterated a position on which all bankers are united: They absolutely refuse to be held personally liable for their assets and those of their families. Consequently, they also refuse to lift banking secrecy on their assets.

Some provisions of the bill in drafting progress raise concerns for some bankers, particularly those relating to institutions unwilling or unable to be restructured.

These include appointing an interim manager for the bank in question (after freezing the powers of the board of directors members and senior management), possibly recovering funds such as excessive and unjustified bonuses and benefits and recovering dividends and bonuses distributed to shareholders and senior executives.

In the event of reasonable suspicion of a civil or criminal offense, the bill also provides for the possibility of bringing proceedings before the competent Lebanese or foreign courts against members of the board of directors, senior managers, auditors or any other person who held office during the five years before the entry into force of the law.

The bankers also put forward several arguments to justify this red line.

To them, the crisis is systemic and resulted from decades of mismanagement of public finances and the state’s default in March 2020.

They argued that they could not be held directly responsible for their massive investments in certificates of deposit at the Banque du Liban (BDL) since they could not safely oppose the regulator's "carrot and stick" policy.

In other words, this is a local adaptation of the famous American adage: "Don't fight the Fed."

They added a list of government decisions they consider contrary to their interests and those of depositors, such as the failure to pass a law on capital controls at the start of the crisis, allowing loans denominated in foreign currency to be repaid in Lira or "lollars" (via bank cheques) and the squandering of $11 billion of BDL reserves to subsidize imported goods and products.

Finally, the bankers insisted on compliance with Article 113 of the Money and Credit Code, which stipulates that the state must write off BDL's losses — these losses mainly relate to BDL certificates of deposit, originally customer deposits.

Pretexts

These arguments and pretexts do not convince many legal or international experts, or the few reform-minded political leaders in Parliament or within the government.

These "excuses" to avoid any responsibility go against the principle of the hierarchy of distribution of losses, on which Lebanon signed the preliminary agreement with the IMF in April 2022.

Some also believe that the deposit crisis dates back to 2015, when the famous financial engineering implemented by BDL — estimated at $76 billion by the audit firm Alvarez & Marsal — allowed BDL to siphon more dollars from the banks in exchange for very "generous" interest rates, sometimes exceeding 30 percent.

Similarly, the rejection of responsibility on the grounds that they had no choice but to follow BDL is unconvincing. The banks willingly entered into these high-risk products and recruited specialized employees to persuade their clients — in Lebanon and abroad — to entrust them with billions of dollars.

The same argument applies to the absence of legal capital controls. Banks have taken advantage of this legislative vacuum in a discretionary manner, allowing politicians, influential people, bankers and their families, and certain privileged clients to transfer funds abroad after Oct. 17, 2019, while prohibiting others from doing so.

Finally, regarding the causes of the crisis, it is worth noting that banks stopped fulfilling their obligations to depositors in the summer of 2019, well before the state defaulted.

Previously, they had committed violations of several provisions of the Money and Credit Code and basic risk management principles. These included non-compliance with the exposure ratio to a single borrower, failing to ensure the proper use of certificates of deposit and Eurobonds by BDL and the state, and colluding with the BDL to invest in certificates of deposit denominated in dollars, even though the Money and Credit Code does not clearly authorize this.

The question of responsibility for the distribution of losses is, in theory, not difficult to resolve. Principles and international best practices clearly indicate that banks, the state and large depositors who were most aware of the risks should be considered first.

However, more than four years into the crisis, the position of the banking lobby remains the most vocal and persuasive to a large part of public opinion for two reasons.

First, this lobby takes depositors hostage by conveying an alarmist vision that government plans would bankrupt banks and, therefore, depositors.

Second, its allies within the current power structure succeeded in imposing the idea — within much of the government, Parliament and even administrative justice (with the State Council's decision on Feb. 6) — that the primary responsibility for the crisis lies with the state. This is precisely what the IMF fears most.

This article was originally published in L'Orient-Le Jour and translated by Sahar Ghoussoub.