Bank restructuring committee
announced by the Central Bank

Includes BDL and bank representatives

The Central Bank (BDL) has formed a committee for restructuring the local banks that will report to the Governor of BDL.

Banks have objected to the name of the committee.

According to a BDL memo, the committee will propose amendments to prudential regulations of banking activity, will study the financial performance of local banks, and propose the required measure to safeguard the soundness of the banking sector.

The committee has the prerogative to seek the assistance of experts to help it accomplish its mission.

The committee will be headed by Bachir Yakzan the newly appointed second Vice Governor of BDL. It will include nine other members, six from BDL and three representing the Association of Banks (ABL).

The members coming from the Central Bank are Pierre Kanaan Director of the Legal Affairs Department and Carine Chartouni Director of Compliance in addition to four members from BDL’s Banking Control Commission (BCCL): Marwan Mikhael, Rabih Nehme, Nouhal Yamout, and Nehmat Hantas.

The ABL representatives are Walid Raphael Chairman of Banque Libano-Française (BLF), Roger Dagher Chief Financial Officer at Bank of Beirut, and Alain Wanna Deputy General Manager at Byblos Bank.

The main task of the committee will be to assess the Expected Credit Loss (ECL) of the banks on their foreign currency (Forex) credit portfolio to BDL and the private sector.

The targeted credit consists of corporate and retail loans as well as the banks’ certificates of deposit (CDs) and deposits with BDL with maturities of more than one year. The committee will also determine the required new Capital Adequacy Ratio (CAR). After the committee submits its proposals, BDL will issue a circular in agreement with the banks requiring the implementation of the new standards which will be overseen by BCCL.

The Central Bank has set an ECL of 45 percent on Eurobonds, 30 percent on forex bank deposits with BDL, and 18.9 percent on the banks’ private sector loans.

A former central banker and currently senior manager at one of the largest banks negotiating with BDL said that there is a disagreement between the banks and BDL regarding the ECL on their deposits and CDs with BDL. ABL had proposed an ECL on these of 7.77 percent which has been rejected by BDL. The Central Bank had estimated the ECL at 30 percent. Moody’s had previously estimated it 18 percent.

A bank with a high ECL means that its CAR will be inadequate and thus it will have to use its profit or provisions to increase its capital. Bank profitability has been pressured and is expressed in lira. Provisions are also in lira and will need to be increased in tandem with changes in the exchange rate. Banks that cannot increase their CAR will have to close if they cannot find a healthier partner to merge with or be acquired by it.

The government had said in its ‘Financial Recovery Plan’ that it will elaborate a comprehensive strategy for the restructuring of the banks’ balance sheets. It also proposed a bail-in that will include writing off the banks’ capital and other liabilities excluding deposits. This will result in complete write off of the banks’ current capital base of LL31 trillion to cover part of their direct aggregated losses, which are estimated by the government at LL64 trillion. Salim Sfeir Chairman of ABL had said following the announcement of the government plan that it is hard to attract foreign shareholders to invest in the equity of local banks due to the current challenges that the global economy is witnessing and that the banks have to rely on local resources.

According to the government plan, the banks’ shareholders will be required to re-inject the dividends they had received over the period 2016-2020. The plan also envisages mergers between banks or acquisitions by other domestic or foreign banks.