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First of all, the decision states that banks must urge their clients (depositors) who have transferred more than a total of five hundred thousand dollars or its equivalent in foreign currency during the period from 1/7/2017 to deposit (that is that is, return from abroad) an amount equivalent to 15% of the value originally transferred in a frozen account of five years.
The fiduciary standards indicate that the chances of success of this step are zero from the starting point. Current and former depositors have no confidence in the banks and the supervisory apparatus that squandered the deposits and to date have been unable to devise a realistic plan to return the deposits to their owners. Even the simplest decisions made hastily by countries that have suffered currency banking crises (Greece, for example), such as Capital Control, the Lebanese state and their apparatus, have not been able to make them until now, after almost a year of the crisis onset, causing billions of dollars to be transferred abroad from the privileged and powerful.
If the goal of this decision is to return some of the huge profits (over 20% per year) that some depositors received from BDL’s financial engineering, then there are clearer and fairer steps to achieve this. Initially, Financial Engineering was open only to large depositors. For example, one of the largest banks in Lebanon, which benefited greatly from these geometries, required the depositor to contribute an amount of at least $ 20 million, which means that the $ 500,000 rating includes a large number of depositors. they did not benefit from financial engineering.
The banks and the Banque du Liban know exactly who benefited from the financial engineering. It is more convenient for the Banque du Liban, with the support of the State, to make decisions aimed directly at the treatment of the enormous surpluses that large depositors obtained to return them. If the interest return, for example, is 20%, while the fair market return is 5%, the goal is to recoup the difference.
This is from a banking point of view. If the goal is to motivate Lebanese who have deposits outside of Lebanon to help revitalize the economy and rebuild the nation, there are other effective and transparent ways to do this, such as establishing a national investment fund managed by independent bodies outside of Lebanon. banking and official sector and known for its integrity and professionalism.
Second, as regards the decision to motivate importers to transfer 15% of the value of the credits that they have opened in the last three years, what is mentioned in the first clause above also applies to them.
However, which importers, who need banking services to open recurring loans, may fear being pressured by the banks if they do not comply with the BDL’s decision. If they agree, the result will be an increase in import prices to offset what importers may consider a loss equivalent to the amounts transferred from abroad.
Third, with regard to imposing a 30% rate on bank presidents and members of the board of directors and main shareholders, the banks’ senior executive departments and the Politically Exposed Persons (PEP) of the transfers that have been done since 07/01/2017, it is a good step. But is this enough?
The responsibility of the presidents, board members, and major shareholders of banks and their top executive management can be much greater. They are primarily responsible for the collapse of the banking sector and the loss of deposits because they violated the basic principles of credit and investment. They are those who lent a client (the Lebanese state, both from its government and from the Bank of Lebanon) that is not worthy of credit (70% of the total assets of the banks (September 2019). Why stop at 7 January 2017? Banks continued their ineffective practice of lending to the Lebanese state for many years prior to this date.
As for politically exposed people, do it. Neither the 30% nor the limited time period is sufficient. Everyone knows the amount of corruption in the political class, but it is surprising that the banking sector is the tool that this class has used over the years to smuggle their money. How was this done with the “know your customer” principles that became the foundation of any sound banking system?
Fourth, the decision asks banks to allow depositors to voluntarily convert their deposits into stocks or bonds in their capital. This is a good step under normal conditions for the functioning of the banking sector, but we are far from that.
The banking sector suffers from a huge gap in its dollar assets of no less than 78 billion dollars (which is the value of bank deposits and loans in dollars with the Banque du Liban and the Lebanese state), which is more than the combined total bank capital. In the absence of a clear plan to restructure the banking sector, bank stocks are worthless, so incentivizing depositors to convert their deposits into stocks in the current situation is useless.
In the event that the situation of the banking sector improves as a result of the restructuring of the sector, the valuation of the banks’ shares must be carried out through specialized and independent financial institutions (the circular establishes that the bank must provide the depositor with a report of valuation of the share value, approved by the Banque du Liban, without specifying the party that prepared the report). . Most depositors do not have the investment competence to ensure the viability of the speculation presented to them, nor its risk for each of them (unqualified investors).
Rebuilding the economy requires a healthy and efficient banking sector. This requires a comprehensive plan to restructure the banking sector, without which the situation will not be restored.
* A CEO who previously worked for the International Finance Corporation.
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