Lebanese banks told to boost capital or exit market by end of Feb

Lebanese banks that cannot increase their capital by 20 percent by the end of February 2021 will have to get out of the market, central bank governor Riad Salameh told Reuters news agency on Thursday.

Those leaving would do so by giving their shares to the central bank, Salameh added, but said he could not speculate how many banks would exit the market.

“We hope all the banks will meet the criteria,” he said in a phone interview. “But after February, those who do not will have to get out of the market … The deposits will be preserved because the bank will not be put into a bankruptcy situation.”

The foreign currency reserves of the Banque du Liban, Lebanon’s central bank, stand at $19.5bn and its obligatory reserve at $17.5bn, Salameh said.

The central bank has also told the country’s banks to recapitalise through new means, urge big depositors to move funds back to the country, and make provisions for a 45 percent loss on their Eurobond holdings, according to a directive published on Thursday.

But the central bank has not spelled out what incentives could be given by banks to encourage depositors to return funds to the banking system, which is paralysed by the worst financial crisis in Lebanon’s history.

It also told banks to provision for a 1.89 percent loss on their hard currency deposits with the central bank, but no losses on their holdings of Lebanese pound certificates of deposit, on top of a provision for a 45 percent loss on Eurobond holdings.

We hope all the banks will meet the criteria.

by Banque du Liban Governor Riad Salameh

The provisions should be in place within five years, but extendable to 10 years with the approval of the central bank.

Lebanon’s cash-strapped banks have frozen savers out of their dollar deposits and largely blocked transfers abroad since late last year as the country sank into a financial meltdown on a scale it has never seen.

The state, one of the world’s most indebted, defaulted on its foreign currency debt in March, citing critically low reserves. Inflation and poverty have soared as the crisis wiped out the value of the local currency on the informal market.

With the country running out of dollars, an official peg of 1,507.5 Lebanese pounds to the United States dollar has remained available for imports of fuel, wheat and medicine.

Salameh told Reuters he could not say how long the central bank could keep subsidising essential imports, which is “depleting reserves”.

“We are not about to float the currency and therefore for the time being we are living with these two exchange rates,” he added.

A devastating explosion at Beirut port this month, which killed at least 180 people and wrecked swathes of the city, on top of a COVID-19 outbreak, has compounded woes.

Talks with the International Monetary Fund (IMF), which Lebanon entered in May, had stalled in the absence of reforms and as a row emerged between the government, the banking sector and politicians over the scale of the country’s vast financial losses.

Salameh said it was in Lebanon’s interest to press ahead with negotiations to try to secure an IMF programme.

The central bank wants domestic banks to recapitalise and boost their liquidity at their correspondent banks abroad, with which they do not have sufficient funds, he said.