Lebanese Banking Sector: New Regulations to Ensure Stability and Security

Introduction

The Lebanese banking sector has been instructed to maintain a daily net trading position against the Lebanese Pound (LBP) that does not exceed 1% of shareholders’ equity. This new regulation aims to ensure the stability and security of the country’s financial system.

Global Position Limitations

• Banks are required to limit their global position, which takes into account either all debit or credit positions of all foreign currency accounts, whichever is bigger, to a maximum of 40% of shareholders’ equity.
• This limitation aims to prevent excessive exposure to foreign currencies and minimize potential risks.

Capital Hedging

• Banks are authorized to hold a structural position of up to 60% of shareholders’ equity to hedge against fluctuations in the exchange rate and protect their capital.
• This provision allows banks to manage their risk and ensure they have sufficient funds to meet their obligations.

Loan Classification and Provisioning

• Lebanese banks must classify loans into five categories for supervisory purposes: standard, watch, substandard, doubtful, and bad debt.
• They are also required to adopt a loan grading system with ten categories.
• Provisioning is regulated by the monetary authorities and is subject to approval by the Banking Control Commission (BCC).
• Provisions constituted under BCC authorization and supervision are tax-deductible.

Legal Reserve and Provision for General Banking Risk

• Banks must build up provisions against doubtful debts and bad debts, which are not subject to taxes.
• They must also distribute all loans and credits in accordance with six main portfolios: retail, small and medium enterprises, corporate, public sector entities, housing, and claims secured by commercial real estate.

International Standards

• Lebanese banks must comply with international standards for the banking industry, including:
  • Basel Committee standards for regulation and internal audit
  • Standards for fighting money laundering and terrorist financing
  • Legal compliance
• They must also adhere to financial stability standards, develop a recovery plan consistent with key attributes of effective resolution regimes, and establish a business continuity plan.
• In addition, banks must comply with international financial reporting standards (IFRS) and implement the International Financial Reporting Standard 9 (IFRS 9).

Conclusion

The new regulations aim to ensure the stability and security of Lebanon’s financial system by limiting banks’ exposure to foreign currencies and requiring them to maintain adequate provisioning against potential losses. By complying with international standards, Lebanese banks can ensure the continued confidence of depositors and investors in the country’s banking sector.