For more than a decade, Banque du Liban (BDL), Lebanon’s central bank, and the Banking Control Commission (BCC), an independent administrative body established at the BDL in 1967 to supervise banks, have maintained a stable banking and financial system. Both have provided the banking sector with strong support, set up a good regulatory environment to enhance the reliability of the system, and have dealt swiftly and effectively with recent “crisis” situations, involving varying degrees of mismanagement at Credit Libanais in the late 80s, Inaash Bank in 1999 and Banque Libanaise pour le Commerce (BLC) in 2001. Most recently, it was forced to deal with the murky affair of the Al Madina Bank, the political implications of which, threatened to undermine the very fabric of the banking system. To its credit, the central bank emerged from the imbroglio with its integrity intact.
The BCC, with its staff of over one hundred, which include around seventy professional bank examiners, is responsible for supervising the financial sector, and monitoring the implementation by the financial institutions of the relevant articles of the Code of Money and Credit (CMC) and their adherence to the BDL’s monetary regulations. It is also supposed to verify and analyze financial statements provided by the institutions it supervises and is empowered to impose corrective measures and restrictions on individual financial institutions if necessary. So far, the track record of the BCC has been proven by the many successful interventions and bank failure preventions that occurred successively since the Intra Bank collapse of 1966. Indeed, the BDL set up the BCC in 1967 to replace the banking control department, which did not have sufficient independence and supervisory responsibilities as broad as today’s BCC. One of the most noticeable accomplishments of the BCC was the saving of Crédit Libanais in the late 1980s. This bank, which had suffered from its affiliation to the collapsed Bank Al Mashrek group, was taken over by the BDL, which re-capitalised it and imposed a senior management that remains to this day. For a number of years, Crédit Libanais remained a BDL-owned bank, whose sole purpose was to manage existing deposits and customers, and restructure operations with the view of ultimately selling the institution to a third party (which was ultimately the Bin Mahfouz group of Saudi Arabia, which owns parts of the National Commercial Bank, one of the largest banks in the Arab world). In the Inaash case, both the BCC and the BDL moved swiftly to find a white knight (Société Générale) to take over that institution, thanks partly with financial incentives, while in the case of BLC, a newly appointed management was brought in by the BDL to restructure the whole bank, and capital of around $150 million was injected, making the central bank a majority shareholder. The BLC case was similar to that of Crédit Libanais, but is currently being managed actively and is actually competing with other domestic banks instead of being constrained by the management of existing customers.
The reason behind the BCC’s swift intervention whenever a bank runs into trouble is explained by the BDL’s cast-in-gold policy, which aims at using all means available to maintain a stable financial and banking system. Indeed, the BDL believes that it would be very costly for the entire Lebanese banking system to allow any bank to fail at this critical stage of the country’s economic development and the image of financial stability must always be maintained in the eyes of international investors. For this reason, many crises of confidence, runs on deposits and bank failures have been dealt with efficiently by the BDL, which has always succeeded in reassuring investors and the public alike. Although, the more recent Bank Al Madina case appeared to have been handled too slowly, it was nevertheless sorted out without the public being too affected by the collapse of a bank that was experiencing abnormal growth.
In the months following the Paris II conference in November 2002, the BDL issued a new directive requesting the banks to increase their statutory reserve requirements. This was another effort to solidify the support and prevention policy as regards to the financial system, as it helps prevent liquidity crises, even though there are doubts as to the ability of banks to access these reserves on a timely basis. The work of the BDL and the BCC is constantly exposed to the fragile domestic economic environment and to radical external events (such as a major regional war or a disastrous domestic political decision) and the raising of the level of statutory reserves is still an insufficient measure when one realizes that there is no formal mechanism under which the BDL can make dollars available to the banks facing runs on deposits. There are however, numerous crises prevention measures. The BDL has laid down a series of regulations, which are meant to assist the banks in times of crises and to prevent a large number of banks from stepping out of normal and healthy banking practice. One measure was to allow banking institutions to hold equity in foreign currency for up to 60% of total equity, matching as a result the dollarization rate of the banks’ consolidated balance sheet. Another measure is to set up the minimum capital adequacy ratio at 12%, compared to 8% in most other countries. All these measures and rules reflect the BDL’s will to prevent major capitalization and liquidity crises, and are supposed to decrease the intensity of intervention in cases of bank failures, which can turn out to be costly and often inextricable.
Elsewhere, the BCC has consistently shown a capacity to intervene and support any banking institution in difficulty, despite the fact that its members (five in total, including the chairman) are appointed according to political affiliation and religious background. The BCC’s members are well supported by a more junior but nonetheless efficient and operational staff. The BCC stands out as arguably the most efficient government regulatory and supervisory authority in Lebanon.
Although the BDL and the BCC have proven to be able regulators and supervisors, particularly as compared to many regional counterparts, there is still significant room for improvement. Indeed, the BDL and the BCC have to start taking a significantly more proactive role when tackling banks in the country, by going beyond the due diligence stage and into enforcing financial and operational directions that would be commensurate with the situation of each individual bank. There must be stronger and more severe ways of making sure that the strategy laid down to each individual bank and every decision made by the BCC is more rapidly and efficiently implemented. There are still a large number of smaller banks, as was the case with BLC, who ignore and evade BDL and BCC rulings and who do not seem to realize that their ultimate collapse could have serious repercussions on both the banking sector and the nation.
The banking environment is now changing rapidly, with most banks in Lebanon having to abandon their traditional policy of gathering deposits and placing them in high yielding government debt securities. Most banks are now asked to behave as commercial banks rather than deposit banks, and establish the appropriate internal systems to step up their lending efforts and support economic growth. The BDL and the BCC, aware of the changing situation, should substantially intensify their pro-activeness, and guide the smaller and more inefficient banks (there is at least thirty of them) towards safe and healthy banking practices. For instance, the BDL and the BCC must guide smaller banks towards:
§ Better risk management à credit and market risks can be more effectively managed with recent techniques. Inexperience could prove fatal.
§ Capital management à Lebanese banks need to be more actively advised on how to allocate the right amount of capital to underpin risks by product.
§ Cost control à Tighter management of operating costs will be the only way to counter thinner margins and limited revenue diversification. The BCC must make this clear to the smaller banks, which have yet to realize this.
§ Product distribution à Product and service diversification and their distribution through efficient channels are key. Although this is not a prerogative of the BCC, the later must nevertheless make sure that banks look at this aspect seriously and make efforts towards achieving that objective.
More severe measures – such as suspending senior managers from their duties and publicly warning an institution (in the press) in a similar manner to regulatory authorities in Europe or North America – must be taken against banks that try to outsmart BDL and BCC directives, and consolidation must, in some cases, be forced. The laissez-faire attitude of the regulator, which worked well in the 1990s, must now give way to a stricter and more severe relationship with mediocre bankers. Leniency and apathy can be extremely damaging, and can lead to major problems such as the collapse of a medium size bank.
Setting up an independent body with the prerogative of going beyond the assessment and situation analysis stage and into actual execution of strategic plans for particular banks, could be the solution. The BCC and the BDL are bound to the tasks of realizing the situation in each individual bank and making recommendations. They cannot easily take pre-emptive measures against any bank, but would rather wait for a significant faux-pas or even an ultimate collapse. A newly set up independent body, with more aggressive prerogatives could be the ticket to greater system-wide efficiency
Such an aggressive body or behavior from the BCC would have come handy in the case of Bank Al Madina, the collapse of which could have been prevented had there been significant pre-emptive measures taken well in advance (e.g. warnings, guidance, etc.). However, it is worth noting that the Bank Al Madina case was known to have been plagued by outside political interference, which hampered the work of the BCC and the BDL. The latter must be allowed to work without such intervention, which normally affects the work of any regulator and supervisor. Political interference in the work of the supervisor affects the credibility of the national regulatory authority, particularly in the eyes of international investors, who remain crucially important for Lebanon.
It will be hard to have a perfectly regulated and supervised banking and financial system in a country where economic fragility is omnipresent and where political interference on behalf of rogue bankers is part of Lebanon’s daily life. The BDL and the BCC are an island of relative effectiveness in a sea of mediocrity. Support, partly in the form of providing the regulator with more seasoned and efficient human resources, or the provision of any necessary means that would help transform the national financial system into a global player, is crucial. This is needed sooner rather than later.