Financial Crime World

Lebanese Banks to Adopt Early Warning Indicators for Risk Management

Enhancing Risk Management Practices

The Bank of Lebanon (Bdl) has issued new guidelines aimed at enhancing the risk management practices of Lebanese banks. The circular, which came into effect on September 30, 2016, requires banks to adopt a set of early warning indicators to identify emerging risks and trigger the activation of their recovery plans.

Recovery Plan Requirements

According to the circular, the banks will use progressive metrics in relation to the Recovery Plan indicators until they reach a threshold that triggers the mandatory activation of the plan. The stress tests adopted by the Bdl will contain:

  • Systemic scenarios
  • Idiosyncratic scenarios specific to each bank
  • Both systemic and idiosyncratic scenarios together

Additionally, stringent assumptions will be used to prompt the activation of the recovery plan.

The recovery plans must be prepared and applied at two different levels:

  • The Lebanese bank level
  • Each main subsidiary of the Lebanese bank abroad, including its branches overseas

Banks are required to promptly provide the Bdl with their adopted recovery plan and any amendments to it.

Capital Adequacy Requirements

To ensure a highly solvent and well-capitalized banking sector, the Bdl has adopted several regulatory measures to maintain capital adequacy levels. According to Circular 6,939 of March 25, 1998, the total capital ratio is defined as the aggregate of:

  • Tier 1 capital (comprising common equity Tier 1 and additional Tier 1 capital)
  • Tier 2 capital

In September 2016, the Bdl amended Circular 6,939 by issuing Intermediate Circular 436, which increased the minimum capital adequacy ratios for banks in Lebanon to 15% from 12%. The increase will be gradual:

  • Minimum capital adequacy ratio of 14% by end-2016
  • Minimum capital adequacy ratio of 14.5% by end-2017
  • Minimum capital adequacy ratio of 15% by end-2018

Enforcement

The Bdl enforces the capital adequacy guidelines through regular reporting requirements. Banks operating in Lebanon are required to report their solvency ratios to:

  • The Bank of Lebanon (Bdl)
  • The Statistic and Economic Research Department at the Bdl
  • At the end of June and December

In addition, banks must implement the Basel II Capital Adequacy Accord, which requires them to compute solvency ratios on an individual or consolidated basis, starting January 1, 2008. The Bdl also requires banks to prepare an action plan for implementing the accord and obtain its approval.

The Lebanese Central Bank (BCC) periodically ascertains the capital adequacy of banks operating in Lebanon and reviews their compliance with the capital adequacy guidelines. Lebanese branches of foreign banks registered in countries that implement the Basel II Accord must submit annual reports on capital adequacy to the BCC, regardless of the approach applied by the head office to the said branches in Lebanon.

Conclusion

The implementation of these measures is aimed at maintaining a highly solvent and well-capitalized banking sector in Lebanon.