Macroeconomic Indicators Set Stage for Early Warning System

The Banque du Liban (BDL) has announced plans to implement a set of early warning indicators that will trigger the activation of the Recovery Plan in the event of emerging risks, aiming to strengthen the resilience of Lebanon’s banking sector.

Framework for Determining Macroeconomic Indicators

The BDL has outlined a framework for determining the set of macroeconomic indicators that will be used to identify potential threats to the banking sector. These indicators will be monitored on a progressive basis, with triggers set at specific levels that will prompt the mandatory activation of the Recovery Plan.

• Systemic scenarios
• Idiosyncratic scenarios specific to each bank
• Both combined

The BDL has emphasized the importance of considering forward-looking prospects when determining the calibration of the Recovery Plan indicators.

Stress Tests for Recovery Options

The BDL has also outlined plans for stress tests that will be used to determine recovery options in the event of a crisis. These tests will include stringent assumptions designed to prompt the activation of the Recovery Plan.

• Prepared and applied at two levels: Lebanese bank level, as well as each main subsidiary of the Lebanese bank abroad
• Including branches overseas

Capital Adequacy Requirements

In addition to the early warning indicators, the BDL has emphasized the importance of maintaining a highly solvent and well-capitalized banking sector. According to Circular 6,939 of March 1998, the total capital ratio is defined as the aggregate of Tier 1 capital and Tier 2 capital.

• Total capital ratio: aggregate of Tier 1 capital and Tier 2 capital
• Minimum capital adequacy ratios:
  • 14% by the end of 2016
  • 14.5% by the end of 2017
  • 15% by the end of 2018

Enforcement of Capital Adequacy Guidelines

The BDL has outlined plans for enforcing capital adequacy guidelines, which include regular reporting requirements for banks operating in Lebanon.

• Regular reporting to:
  • BCC (Banking Control Commission)
  • Statistic and Economic Research Department at the BDL
• On a quarterly basis
• Internal capital adequacy assessment processes conducted in accordance with Basel II
• Lebanese branches of foreign banks registered in countries that implement Basel II are required to submit annual reports on capital adequacy to the BCC

Conclusion

The BDL’s plans for implementing early warning indicators and stress tests designed to trigger the activation of the Recovery Plan demonstrate a commitment to maintaining a highly resilient banking sector in Lebanon.