Lebanon's parliament approved a banking sector restructuring bill, but actual deposit protection depends on passage of a separate financial stability law that has not yet been enacted.
Parliament approved a bill to restructure the banking sector, but actual deposit protection depends on passage of a separate law on financial stability that has not yet been approved.
Passage of the bank reform law represents a legislative step in addressing a financial crisis that began in 2019, but it does not resolve the crisis on its own. The law creates a framework for restructuring the banking sector by examining the situation of each bank and determining which institutions are viable, which need restructuring or merger, and which cannot continue operating. However, applying this framework remains tied to passage of the financial stability and deposit recovery law, known as the gap law, which has not yet been approved and is under further review.
The law establishes a higher banking authority with two chambers with different powers. The second chamber is responsible for making decisions on whether banks undergo restructuring or liquidation, based on regulatory assessments and reports. This chamber determines the appropriate path for each bank, from recapitalization and restructuring to merger or liquidation if necessary.
Article 11 sparked intense debate among parliamentarians. This article limits shareholder participation in bank recapitalization to minority shareholders, excluding majority shareholders or those with control rights. This relates to the bail-in principle, which places losses on shareholders and some creditors and recapitalizes the bank before resorting to state funds.
The law establishes a hierarchy for loss absorption beginning with equity and capital instruments, then moving to creditors according to their legal rank. However, how deposits will be handled, protected and recovered remains fundamentally tied to what the financial stability and deposit recovery law will determine.
Article 23, as drafted by the finance and budget committee, provides for coverage of deposits in banks undergoing liquidation according to the criteria and provisions of the gap law. This provision drew objection from Finance Minister Yassin Jabber due to the risk of placing future financial burdens on the state. This means the state could bear additional costs in the event of bank liquidations.
Parliament rejected a proposal from the finance and budget committee regarding Article 3 aimed at linking implementation of the law to the Monetary and Credit Law, specifically Article 70 of that law. This rejection reflects clear disagreement over the powers of the second chamber in the higher banking authority compared to the powers of Banque du Liban and the central council.
Gaby Mourad, office director for MP Ibrahim Kanaan, said the deposit file is directly linked to the financial stability law, which is still under review by the finance and budget committee. He explained that the bank reform law aims to map out restructuring of the sector by examining each bank's situation and determining which are viable, which need restructuring or merger, and which may not be able to continue.
Mourad pointed out that addressing the crisis requires determining responsibility between the Lebanese state, Banque du Liban, and commercial banks, and establishing how much each party bears and the mechanism for returning funds to depositors. He stressed that the goal of restructuring is not to place the cost of bank failure on the depositor, emphasizing the importance of protecting depositor rights. But the final mechanism for recovering deposits remains tied to the financial stability law, which will determine how losses are distributed and how payments will be made.
Passage of the law represents an essential step but does not resolve the financial crisis on its own. Rebuilding the sector requires determining and distributing losses, establishing a mechanism for deposit recovery, and then reconstituting a banking sector capable of financing the economy and restoring confidence. The real test will be in how banks are classified, how losses are distributed, and how depositors are protected.
Parliament has approved the legal framework for restructuring the sector, but the transition to actual implementation remains dependent on passage of the financial stability and deposit recovery law. After that, the fate of deposits and the mechanism for their protection will be determined, and responsibility will be allocated among the state, Banque du Liban, and the banks, ultimately leading to restoration of confidence in the banking system.
