Lebanon Takes a Stab at Revamping Lenders With Central Bank Plan

(Bloomberg) --

Lebanon’s central bank set out a plan to revamp the country’s ailing financial industry that rests in part on the shaky proposition of persuading those with possible links to politicians to repatriate some funds.

The regulator in Beirut issued a series of instructions on Thursday, asking lenders to boost capital and offer clients securities in return for their deposits. Officials have in the past accused bankers of transferring billions of dollars outside Lebanon to evade capital controls and protect their money during the crisis.

The circular also told banks to repatriate some funds from people -- including their shareholders -- considered “politically exposed,” a designation used to identify those with possible ties to politicians or in control of companies that count politicians as partners or equity owners.

Faced with a currency collapse and the worst economic meltdown in decades, Lebanon is looking to claw back capital as it contends with financial losses triple the size of its gross domestic product.

The measures outlined on Thursday should have been part of a comprehensive plan that evaluates the central bank’s own liabilities and assets and government debt, according to Adel Afiouni, a former banker and ex-minister of state for information technology.

‘Wishful Thinking’

“I can’t see how banks can recapitalize and call for new capital from investors or depositors without a clean and transparent balance sheet,” Afiouni said. “It’s also wishful thinking when it comes to asking banks to try to repatriate funds and convince depositors to convert their deposits to instruments.”

Since protests erupted last October, banks have imposed de facto capital controls on accounts in the U.S. currency, effectively banning dollar withdrawals and transfers abroad.

Clients were allowed to withdraw money by converting dollars into the local currency at a weaker rate than the official fixed exchange rate.

International donors now say Lebanon can’t count on their support without a solid reform agenda including an overhaul of the financial industry and the central bank. A devastating explosion in the capital prompted the government to resign this month.

Financial Engineering

Starting in 2016 and for several years later, the central bank, also known as Banque Du Liban or BdL, conducted so-called financial engineering to boost its foreign-exchange reserves.

It provided high returns in liras and in the U.S. currency on new dollar bank deposits at the central bank. The International Monetary Fund has estimated the operations attracted over $24 billion from banks through February 2019 in sales to or as deposits with the central bank.

The banking revamp as outlined by the BdL is an attempt to find a middle ground after the government put forth a program following its bond default in March that sought to restructure the country’s $90 billion in debt. Many lenders feared for their survival under the government’s proposal that could have wiped out billions from shareholder capital.

The plan, which had the backing of the IMF, envisaged a full bail-in of existing shareholders and sought to draw back the sums that have allegedly been transferred during the crisis and profits made from the financial engineering. It also sought to restructure the BdL’s balance sheet including its liabilities. The central bank owes about $80 billion to lenders.

Commercial banks have responded by urging the government to repay what it owes to the BdL by setting up a $40 billion “defeasance fund” that could settle its debt to the central bank.

Plan of Action

Under the central bank’s roadmap, lenders are asked to encourage clients who transferred at least $500,000 abroad from July 2017 until now to deposit 15% of the amount in a fixed-rate account for five years. “Politically exposed persons” should deposit 30% of the money taken out of Lebanon.

Banks should use these deposits to finance foreign operations to stimulate the economy and should adopt a legal agreement between them and their clients to return the deposit upon maturity, according to the circular.

The central bank also asked lenders to conduct a fair valuation of their assets and liabilities to restructure their capital or increase it by the first quarter of 2021. The regulator has previously asked banks to increase their capital by 20% by June of this year.

Lenders were also told to set aside provisions against their dollar deposits at the BdL and the government’s securities in dollars and the local currency for a five-year period. For their holdings of Lebanese government Eurobonds, banks would have to set aside money under the assumption of a 45% loss in value.

The regulator will gradually lower the requirement.

Clients whose deposits have already been impaired due to the currency crisis can convert their deposits into shares or into redeemable, tradable and convertible perpetual bonds, the circular said.

©2020 Bloomberg L.P.