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Yvonne Anwar Souaibi wrote on Asas Media:
There are no solutions to the crisis that the banking sector is going through in the foreseeable future. Contrary to the theories that speak of the merger as a way out of the bank collapse, Dr. Ghassan Al-Ayyash, former deputy governor of the Banque du Liban, who considers in this interview with “Asas” that “mergers or acquisitions required the presence Of a strong fused bench and a reeling fused bench. The current moment is marked by heavy losses suffered by the vast majority of banks, especially the large ones, so merging to rescue will not be the title of the next stage. This means that without restructuring the sector in the sense of recapitalizing it, the sector will not be saved, especially since every time financial institutions face imminent risks, there is talk of mergers under the heading of banking reform.
To what extent is it necessary to increase the capital of Lebanese banks?
– When the bank’s investments give rise to realized losses that exceed the capital, this means that this institution has begun to finance the loss with the deposits that have been entrusted to it. This rule applies to one bank, several banks, or the entire banking system.
Therefore, the laws that govern and regulate banking activity oblige any bank that perceives losses of its capital to take the initiative to cover the loss in short periods, so that the loss does not expand and the deposits are exposed to melt.
The current outlook is represented by heavy losses suffered by the vast majority of banks, particularly the largest ones. Therefore, merging to rescue will not be the title of the next stage
It is agreed that the Lebanese banking system suffers large losses arising from several reasons, the most prominent of which is the decrease in the value of its loans to the State that cannot pay its debts, and the decrease in its employment at the Banque du Liban, which in turn suffered large losses as a consequence of financing the state deficit and the balance of payments deficit, in addition to bank losses. In its loans to the private sector due to the country’s major economic recession.
What are the limits on the required increases in bank capital?
– Capital increases must be sufficient to cover the losses of the banking sector for the reasons we mentioned, that is, what is required is to cover the losses of the sector. In the current Lebanese situation, estimating the aforementioned losses is not automatic, as is the case with a single bank that has losses due to poor loans to its clients. Rather, it is first necessary to determine the losses on state debt and investments in the Central Bank.
This issue has been pending for almost a year due to the lack of consensus to estimate these losses among three parties: the state, the Bank of Lebanon and the Association of Banks. This difference led to the entry of a fourth party down the line, which is the House Finance and Budget Committee, which focused on the issue and had its own estimates of financial sector losses.
A decision on this issue is necessary for losses to recover, if possible, and for the banking sector to resume normal activities. However, it is regrettable that the differences have been frozen at a certain point under the supervision of the International Monetary Fund and that the differences have not yet been resolved. The losses became like the incurable disease that devours the human body without treatment, pending the agreement of the doctors to diagnose the disease and choose the right medicine.
In the current Lebanese context, loss estimation is not automatic, as is the case with a single bank that has losses due to poor loans to its clients. Rather, it is first necessary to determine the losses on state debt and investments in the Central Bank.
The country is frozen until it is agreed to estimate the losses and distribute them to the parties. In this context, some refused to involve the State in the burden of losses, despite the fact that it bears the main responsibility for spending, waste, chaos and corruption.
How does the amount of additional capital required for banks differ from one formula to another?
– The document prepared by the Hassan Diab government under the title A financial recovery plan estimated the losses of the financial sector at more than 80 billion dollars, and suggested uploading it to the Banque du Liban and the banks. And the amount that the newspaper proposed to raise to shareholders and bank depositors amounted to about 60,000 million dollars, taking into account that the total of private funds in the sector amounts to about 20,000 million dollars. From here, and if this role is imposed, it is possible to glimpse the large volume required to increase the capital of banks and / or deduct it from deposits.
How can this money be secured? What if a bank could not increase its capital to the required level?
B – First, banks must increase their own funds by subscribing old or new shareholders for this increase. The difficulty here is related to the weakness of the underwriting capacity of shareholders in the current circumstances, due to bank losses and the drop in the exchange rate that worries shareholders who transfer their money from abroad. Furthermore, the de facto Capital Control (without law) does not incentivize shareholders to increase their contributions because they do not know when they can take their supposed profits abroad.
Furthermore, the media atmosphere hostile to the banking industry in Lebanon does not encourage shareholders, as banks are rightly or wrongly accused.
However, this fact is relative, since there are shareholders who believe that their abstention from the subscription entails the loss of the capital that is currently left in the banks, so the injection of additional funds helps to save their current employment in their banks.
Of course, the situation varies from bank to bank. There are banks that incurred large losses compared to banks with limited losses and require limited capital. It largely depends on the size of each bank and the size of its investments in public sector debt.
The document prepared by the Hassan Diab government under the title A financial recovery plan estimated the losses of the financial sector at more than 80 billion dollars and suggested uploading it to the Bank of Lebanon and the banks.
What if one or more banks failed to achieve the required increase in their capital? Do you resort to merging with another bank?
– In the various previous banking crises in Lebanon, since the intrabank crisis, it was common for a large bank, or let’s say a strong bank, to acquire the bank that was in default. The acquisition is made by purchasing the merged bank’s assets and liabilities from the merged bank, or the stronger bank purchases the defaulting bank with all its components, including the license and branches.
The BDL’s policy was to facilitate these mergers to quell the crisis in any bank in its infancy and prevent a banking crisis from turning into a crisis of the system. Furthermore, encouraging mergers was a policy adhered to by the state as a whole, in the legislative and executive branches, and laws were passed to facilitate mergers and the acquisition by solid banks of troubled banks.
Therefore, fertile imaginations and new ideas are needed to get out of the crisis. In light of the inability to invest in Lebanon, including increased investment in banks, and given the difficulty of resorting to merger, it is clear that the crisis must be addressed as a whole using various and multiple means within the project of Integral reform.
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