Hacking Lebanese Politics (& Economics) #20: Lebanon’s new bank resolution law

Parliament passed on July 31 the long-stalled bank resolution law, after months of bickering in the Finance and Budget Committee’s subcommittee. The main issue: The dissatisfaction of central bank governor Karim Souaid with the composition of the Higher Banking Authority – the body that will oversee the sector’s restructuring – and a matter on which a compromise was eventually reached.

The main goal of the law is to tackle Lebanon's six-year-long banking crisis. Until now, the country’s near-bankrupt banks have limped along like a ‘zombie’ sector, all while illegally trapping people’s deposits.

The economic meltdown of 2019 wasn’t just one crisis; it was three at once: a currency collapse, a sovereign debt default, and a banking crisis, all feeding off each other.

Previously on Hacking Lebanese Politics:

Hacking Lebanese Politics #6: What’s the deal with the banking secrecy law?

The new bank resolution law is one of the IMF’s key conditions for a rescue package. That deal, if it happens, would act like a seal of approval to unlock more international funding — something Lebanon has been denied for years because of corruption and financial mismanagement.

So, what’s actually in this new law? And why does it matter? We break it down for you with the help of financial analyst Mike Azar.

What does “bank restructuring” even mean?

In short, it’s about trying to bring both individual institutions and the entire financial system back to life, solvency and profitability. That usually involves:

• Consolidating the banks that can still be saved and strengthening the overall operating environment of the sector.
• Shutting down the ones that are insolvent (and beyond repair) through resolution measures.

It’s not quick or easy. The process needs new laws, serious institutional reforms, and a full plan for liquidations, mergers, and recapitalization. In practice, it often means a much smaller banking system sector, and big shakeups in who owns what.

Last week's edition:

Hacking Lebanese Politics #19: How renting works in Lebanon

What does Lebanon’s bank resolution law entail?

The law basically sets the rules for how Lebanon will deal with its failing banks. Here’s how it works:

Check-up time: Each bank will get its financial situation examined by an independent evaluator chosen by the BDL’s Banking Control Commission (BCC), the watchdog that oversees banks, money dealers, and financial firms.

Based on these evaluations, the BCC will issue recommendations to the Higher Banking Authority (HBA), which will then decide the fate of each bank under two possible scenarios:

• Liquidation of non-viable banks: If a bank is found to be beyond saving, the BCC will recommend its liquidation. This means closing the institution and all its branches, selling off its assets, and using the money raised to pay back as much of its debts as possible. A liquidation manager will oversee the process and creditors — including depositors — will receive whatever portion of their funds can be recovered from the liquidation
• Restructuring of salvageable banks: If a bank is considered capable of survival, the BCC will recommend restructuring. This can involve several tools: a bail-in (where the bank’s debt is converted into equity shares), mergers with other institutions, the sale of some of its assets, or splitting up the bank to preserve the parts that are still viable

Does the law really deliver and meet IMF standards?

Experts say the law is solid when it comes to laying out a framework. The IMF, which stepped in during the drafting process to suggest changes, welcomed the law’s adoption after years of delays. But a closer look shows that while some of the IMF’s comments were incorporated, several key ones were left out.

One key omission concerns the powers granted to bank creditors and shareholders against HBA decisions. In the current version of the law, Article 31 guarantees the right of appeal against resolution and liquidation decisions. This means they can still file lawsuits or pursue administrative measures that could stall or even block what’s supposed to be a fast-moving resolution process. 

The IMF deemed it appropriate to reintroduce a provision to prevent any form of obstruction or dilatory maneuver, by limiting such appeals to a simple legal review without allowing judges to intervene on technical assessments or substantive judgments — this was, however, not incorporated in the final version.

These loopholes leave Lebanon’s law out of step with international standards. 

More HLP:

Hacking Lebanese Politics #13: Iran in Lebanon: How deep does the influence go?

What’s the difference between the banking restructuring and the gap resolution law?

The bank resolution law sets the legal framework for restructuring Lebanon’s banking sector and sets up the body in charge of making it happen. But the most contentious questions remain: how to divide up the financial sector’s estimated $80 billion in losses, how depositors will be treated and how much money they can hope to recover, and what happens to bank shareholders. 

All of those questions are pushed to the forthcoming gap resolution law, a separate piece of legislation that is yet to be drafted. 

In reality, this means the bank resolution law won’t actually kick in until the gap resolution law is enacted.