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Questions on data, policy design, and usefulness of assumptions

To bank or not to bank

by Thomas Schellen

Economic man is a curious construct. Once thought to be a being superior to the common human in his pursuit of value creation and profit generation, the image of this specialized imaginary human subspecies has fundamentally changed. In fact, economic man has reached a point where some contemporary economists describe this model as emotionally dysfunctional—proposing that economic behavior today requires old paradigms of social paternalism to be replaced by models of social maternalism that might have the power to heal societal cleavages.

Such a genderized ideological spin, however superior a social maternalism model could turn out to be in comparison with the historic male economic models and their many inequities, entails its own riskiness if one considers that any exclusionary assumption of absolute or merely relative superiority engenders dangers for social integrity—whether under current strivings for improved gender sensitivity, greater economic equality, and elimination of racism, or under older concepts of socialization of private property. Strong notions for the need of new paradigms in economy and finance notwithstanding, the fact is that, by today’s realities, economic man and his financial sub-variety, banking man (uncovered by this magazine’s anthropological research team as homo banco bancorum, who originated in the eastern Mediterranean but has spread all over the world) have culturally evolved by historic necessity.

Widening the perspectives

The anthropological assumptions of economic and banking man have morphed into modern concepts of economic agents that require a base of inclusiveness and openness to diversity to achieve their purpose of individual profit optimization within the context of social productivity and integrity. Even the dinosaur-like clinging stakeholders in corporate and financial life who—by the clear evidence of the male-dominant composition of boardrooms (around the world, not just in Arab countries)—have desperately resisted to go as far really accepting women as their equals, have long been forced to change their tune to, albeit only verbal, affirmations of inclusiveness and social integrity in diverseness.

In addition to the widening of the perspectives with regard to banking and organized or formal economy from the particular, exclusionary, and self-interested focuses to their importance for and orientation upon inclusive growth as core attitudinal component, the other core element necessary for the sustenance and redemption of both the modern economic person and homo banco is data. Data related to the business cycle, the financial market, and all kinds of economic risks have to be properly collected, organized, and interpreted.

Relatively sparse and hard to acquire before the arrival of the digital era, such data has become the life blood of economic existence and has been, for the last 20 or so years, turned into virtual torrents that nurture economic planning and reinforce understanding. Data thus demonstrates tangibly that it is, for example, better for a society, specifically any society that aims for broad economic growth, to develop its banking further than to artificially, ideologically restrain financial markets.

As the data experiences of the year 2020 are underlining with their uncertain and, in hindsight, faulty assumptions about the coronavirus threat and modeling of this threat and economic ramifications, collection of correct and complete data and its proper evaluation is vital for preserving the intactness of the entire social body and the individual social cell, and is crucial for protecting national and individual fortunes.

The same point of the importance of data is being driven home with full force also by the Lebanese economic and financial crisis. In all efforts to assess and address this crisis, there have been huge problems related to the disagreement on data, the interpretation of data streams, and the general insecurity over historical economic data as well as the particular uncertainty over the speed and accuracy of computation of very recent financial and monetary data.

This uncertainty affects both the necessary exceptional analyses relating to the emergency situations on the fiscal, central bank, and commercial banking levels and to the reading and contextualization of the regular data streams of banking, financial markets, public finance, and real economy indicators that have been flowing, albeit persistently less perfectly than desirable, for many years (and that have often been reported and commented on in Executive, for example in our mid-year banking focus coverages and end-of-year analysis and outlook issues).

Additionally, the recent months and days have been illuminating the questionable validity of narratives that are incessantly being concocted around data. Such narratives are spread indiscriminately, often without any prior examination and scientific process of verification. In this sense, fake data and also incomplete or misunderstood data has proven to be the opposite of the stabilizing and correcting informational factors that data should be. Fears created by misleading and fake data narratives in Lebanon are actually proving to be even more damaging than the existing data uncertainties, a problem that is further exacerbated by the wielding of fake data as a weapon in the creation of panic and the instigation of excessive mass fearfulness.  

Not to forget, there already are devastating and highly warranted fear factors in the real economy of 2020. These fears and the underlying existential threats are bad enough. But it is precisely those circumstances of real existing economic and social threats to the people that make the addition of fake data narratives such potent dangers that can lead to either unjustified depression and economic paralysis or to confrontation and violence as seen in the first two weeks of June which—if building up much farther—could ultimately escalate into self-destruction of Lebanese society.

The crucial role of assumptions

The data assumptions in the government’s economic rescue plan in this context are critically important and need to be beyond reproach as they will inform the way in which the immediate course of financial rescue is pursued. As Dany Baz, chief executive officer of analysis provider and consultancy Bankdata speaks to Executive about the veracity of the data used for assessing the Lebanese financial hole, the underlying numbers on the size of banking deposits are based on solid information published regularly by Banque du Liban (BDL), Lebanon’s central bank. “BDL publishes its balance sheet fortnightly and total bank deposits are clearly highlighted in the breakdown by currency is based on estimates and obviously USD exposure is paramount,” she says. “Figures of $75-80 billion of foreign currency deposits are realistic.” 

Also in terms of the impairments of banking assets, she considers the three main sources of impairment to be real, namely the exposure, mainly in hard currency, of banks to BDL, the exposure of banks to eurobonds, and their loan exposure on the domestic private sector. “However, there are some details that need to be taken into account when calculating total impairment [as] I believe the government estimate was more in terms of stock than in terms of flows,” she adds (stock being a snapshot of time as opposed to flow being over time).

Baz points out that regarding banks’ exposure to BDL, no reference to the average duration of these deposits, estimated at seven and a half years, was clearly presented by the Lebanese government in its financial rescue plan. “Was duration taken into account?” she asks, noting that within the current economic and political context, calculation of net present value (value over a certain time period) of this exposure would be much lower than the government assumed, irrespective of what discount rate is used. “Consequently, the total stated impairment would be reduced, bearing in mind that according to international accounting standards, [estimation of expected credit loss] on this exposure should be undertaken, translating into obvious provisioning requirements that would represent a material portion of the stated exposure,” she explains. Or simply put, under accounting rules banks must assume that some money owed to them will not be paid back and so they put aside a provision (a projected expense recorded on their books) to cover this eventuality, meaning that when they reassess the likelihood of repayment, the amount written off is lowered by the difference between the new expected loss and the previously assumed loss already accounted for on their balance sheets.

Uncertainty in terms of the size of eurobond exposure relates, according to Baz, to the question of if and how the residual value (the value after an event) was taken into account, noting that current prices of eurobonds in secondary markets are not reflective of the residual values today and the outcome of negotiations with bondholders have to be waited for to have a real assessment of residual values. Also concerning the size of banks’ loan exposure to the private sector, Baz sees a need for clarification. “It was probably based on flat percentage assumptions and we don’t know if such a figure includes existing cash collaterals and real guarantees on impaired loans (loans that lenders think will likely not be paid in full), which would revise the total downward,” she tells Executive (see Q&A below).

Q&A with Dany Baz

In order to better comprehend what data-related factors in banking might have contributed to the buildup of Lebanon’s factual crisis of the century, Executive sat down virtually with Dany Baz, general manager of Bankdata.

Were banks in your opinion aware of the building of imbalances and the dimensions of the shortfalls now reported?

Banks were definitely aware of the many challenges ahead since their job is to buy risks while ensuring that they are well-monitored, priced, and covered. Nonetheless, the sustainability of the system, within the transition management toward the long-awaited improvement of the economic situation, would have entailed maintaining, at all times and by any means, a sufficient foreign liquidity cushion placed with correspondent banks abroad. In order to keep servicing customer requests, mainly in terms of transfers abroad and cash withdrawals, we estimate the cushion at 20 percent of the foreign currency deposit base. This would have prevented everything we are witnessing from happening. Exacerbation of internal political tensions and weakness in political speech and response heavily impacted confidence, which led to the blowing up of the rapidly deteriorating situation.  

Was there an effort to hide these problems from analysts such as Bankdata and from the general public?

Bankdata does not express any opinion on the financial situation of banks. We require audited financial statements that are undergone by the big four audit firms operating in Lebanon. That said, banks were transparent in their three exposures and figures are correct and available to all. If extraordinary events led to the sudden deterioration of the underlying quality of such exposures, the normal evolution was to reach the situation today.

What do you think of the explanation that the high influx of funds into the banking system in 2007-2010 was the sole or main reason for the later buildup of financial and currency imbalances?

This is the classical debate between an oversized financial system and an undersized economy. The answer is yes if the abundant liquidity was misused by not channeling it into productive investments to grow the GDP or bridge the gap between actual and potential GDP. Our GDP should have been at $120 billion if not for the numerous setbacks we have been through. Had the funds been channeled toward productive investments and job creations, then they would have been salutary.

Did the various governments in power since 2007 have a fiduciary duty to examine and restrain BDL exposure and fulfill such a duty?

Monetary authorities in Lebanon are independent by law. The government’s interaction/supervision is delimited by its representation in the Banque du Liban (BDL) Central Council and in the Higher Banking Commission, where all executive powers are embedded, through the memberships of the Director General of the Ministry of Finance, the Director General of the Ministry of Economy and Trade, and the judge approved by the Higher Judicial Council and appointed by government decree. Should each party fulfill its role, then the government should have been aware as it participated in major decisions via these three representatives.

What can be said about the basic idea of banking sector restructuring and the organizational aspects of such a project from the viewpoint of the sector’s role in employment of Lebanese?

Any bank restructuring is salutary as long as it translates into a higher access to finance, mainly from SMEs, MSMEs, and the youth, as well as more efficient services at a lower cost.  

What is the size of the ancillary economic activities that feed into banking as menial, clerical, and professional services?

It is difficult to estimate ancillary economic activities, mostly in terms of outsourcing, at this stage.

What do you expect the impact of a banking sector restructuring or eventually forced consolidation to be on the ancillary economy, the work prospects of a company like Bankdata and the capacity of Lebanon as financial analysis center in the region?

Lebanon’s banking sector represented four times its GDP and therefore should have two to three mega entities ranking in the top 10 to 15 regional banks. At a decent horizon, this should attract more funds into Lebanon and create more jobs and opportunities in the sector and the economy. As for prospects, companies will certainly struggle to adjust and survive in the short term and I am confident that the renowned resilience and creativity of the Lebanese will allow us to rebound. As for Bankdata, our 38 years of collaboration with the banking sector through highs and lows is nurturing both our energy to overcome this phase and our hope to perpetuate the transparency and professionalism that has made our financial sector unique.

Concerns beyond banking matters

The need to further examine and evaluate the government’s rescue plan extends beyond the questions concerning materially important aspects of the assumed banking exposure and related data. This has been pointed out by many interested parties to the rescue mission, premier among them the Association of Banks in Lebanon (ABL), in its “Contribution to the Lebanese Government’s Financial Recovery Plan.” Describing the government’s plan as a mere “accounting exercise,” the contribution consists of two pillars (immediate response action and long-term structural reforms) and five priorities, the first (debt restructuring) and fourth (financial sector restructuring) of which are most material to the future of banking in Lebanon.

The contribution’s sharpest and most noteworthy conceptual divergence from the government plan’s assumptions is the affirmation of the principle of market integrity as paramount for any banking sector restructuring and recapitalization. A “one-size-fits-all approach” to this task would be detrimental to the entire economy, ABL emphasizes, and recapitalization needs to adhere to the principle of “case-by-case” guidance by the central bank as a regulator, under the “aegis of the Basel III systemic event forbearance system.” The regulator alone should decide if any banking entities need to be resolved.

“The plan anticipates that the regulator may also encourage some of the more weakly-capitalized financial institutions to merge,” ABL allowed. Elaborating further on the association’s perspective, ABL board member Tanal Sabbah pointed out to media in a rare June 2020 gathering that an approach such as merging two banks that have become problematic because of imposition of a haircut would not solve anything because “as they say, two chicken don’t make an eagle.” (For further banking opinions on the restructuring topic see banking economist story).

Questions on the government plan have come as well from less-directly affected stakeholders in the economy, a good example of which is a paper produced by academic researchers affiliated with the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut. “The plan raises several questions regarding its many assumptions and the calculation of its values,” writes Nasser Yassin, Professor of Policy and Director of IFI, in an introduction to short analyses produced individually by nine different experts.

Poring over aspects of the plan, these researchers voiced their concerns over the governmental concepts in the areas of the time frame of reforms, monetary policy, perspectives on spending reduction and increasing of state revenue, the proposed creation of a Public Asset Management Company, attempts to improve competitiveness, energy sector reform, the social component, and the necessity of the alignment with the International Monetary Fund (IMF). Among many other points, the academics noted the discrepancies between figures presented in the plan’s April 30 version with those used in a previous version, the nature of the plan as political statement, many promises for enhancement of competitiveness that are not accompanied by concepts of their financing, and the dichotomy between the plan’s list of desirable outcomes and its absence of plans for sequencing in form of a roadmap with metrics, a convincing timetable, and an assertion of accountability.

Many reasons to deliberate fast and carefully

This discussion is healthy and necessary even as it requires time and places the stakeholders in positions of having to elaborate on their visions and explain them—specifically the government with its agenda of presumably very serious reforms and the banking sector with its presumed interest in cleaning up and improving its practices as the primary concerned parties, but also all the academics, compassionate business leaders, and organizations. What is neither healthy nor helpful, however, but instead an objectionable waste of time, is any obsessing of primary stakeholders at the top of national decision chains with defensively-minded attributions of guilt to other primary stakeholders for their alleged past sins.

Despite all presumed educatedness and sophistication attained under the power of modern human development, dependence on data and tendency to blindly rely on it have been revealed during the coronavirus crises for their fatal potential to instigate and exaggerate herd behavior of the 21st century economic person. Even in our time, data pretentions can cause fears and amplify them rapidly. Fake data, and quite transparently fake data at that, have been factors in the escalation of fears and unrest on Lebanese streets in the month of June.  

It is therefore not only that data and its exaggerated assessments under the impact of fearful biases have arguably stoked the fires of metaphysical economic uncertainty during the trajectory of the Lebanese economic crisis over the past nine or ten months. In regarding the contribution of fake data and malicious rumors to the outbreak of violent fears in the distressed Lebanese population groups in the course of the country’s existential crisis, the conclusion could be the same as it also suggests itself globally from the 2020 coronavirus crisis: a combination of incomplete data, its premature interpretation, instantaneous transmission, and human herd behavior makes for a lethal cocktail with the potential to kill any economy. To avert this risk requires maturity of vision and clarity of confirmed data.

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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