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Lebanese Banks Adopt New Recovery Plan Amid Economic Uncertainty
In a bid to ensure the stability of the Lebanese banking sector, the Banque du Liban (BDL) has issued new guidelines for banks to adopt a recovery plan. The plan aims to identify emerging risks and trigger mandatory activation of the recovery measures when necessary.
Recovery Plan Guidelines
According to the new guidelines, banks will need to determine a set of early warning indicators to identify potential risks. These indicators will be monitored using progressive metrics related to the Recovery Plan’s indicators until they reach a threshold that triggers the activation of the plan.
The Recovery Plan will also take into account forward-looking prospects when determining the calibration of its indicators. The plan will include stress tests that consider systemic scenarios, idiosyncratic scenarios specific to each bank, and both together. The tests will be based on stringent assumptions that prompt the activation of the recovery plan.
Implementation
The plan will be prepared and applied at two levels: the Lebanese bank level and each main subsidiary abroad, including its branches overseas.
Banks must also promptly provide the BDL with their adopted Recovery Plan and any amendments to it. Circular 294 of 28/12/2017 issued by the BDL outlines the required sections that should be included in the plan, including a business plan, governance, recovery indicators, stress tests, and recovery options and impact assessment.
Capital Adequacy Requirements
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The BDL has implemented several regulatory measures to ensure banks maintain a sound capital adequacy level. Circular 6,939 of 25 March 1998 defines the total capital ratio as the aggregate of Tier 1 capital and 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 the previous 12%. The increase will be gradual, with banks required to meet a minimum capital adequacy ratio of:
- 14% by the end of 2016
- 14.5% by the end of 2017
- 15% by the end of 2018
The Circular also requires banks to comply with a minimum common equity Tier 1 ratio of:
- 8.5% at the end of 2016
- 9% at the end of 2017
- 10% at the end of 2018
Enforcement
The BDL ensures compliance with capital adequacy guidelines through regular reporting by banks to the Banking Control Commission (BCC) and the Statistic and Economic Research Department at the BDL. Banks are required to report their solvency ratios at the end of:
- June
- December
Circular 104 of 1 April 2006 requires banks to implement the Basel II Capital Adequacy Accord in a diligent and progressive manner, starting January 2008. The Circular also requires banks to compute market risks and include capital requirements to cover market risks in their solvency-ratio calculation.
The BCC requires banks operating in Lebanon to initiate an internal capital adequacy assessment process in accordance with the second pillar of Basel II. Lebanese branches of foreign banks registered in countries that implement the Basel II Accord must submit annual reports on capital adequacy to the BCC.
Periodic Assessment
The BDL will periodically assess the capital adequacy of banks and review their compliance with regulatory requirements.