Lebanon’s banking crisis — the worst in its modern history — wasn’t caused by a miscalculation of numbers. It was caused by a collapse of oversight, a hollowing out of regulatory will, and a systemic abandonment of risk management principles. Pillar 2 of the Basel regulatory framework — the qualitative heart of banking supervision — was not simply neglected, it was neutralized. Key tools such as the Internal Capital Adequacy Assessment Process (ICAAP), Risk and Control Self-Assessments (RCSA), and stress testing were reduced to formalities. What emerged was a Potemkin village of financial regulation: strong ratios on paper, rotting fundamentals underneath.
While Lebanese banks proudly reported Tier 1 capital ratios above 14%, they were in effect balance sheet mirages. In reality, nearly 70% of Lebanese bank assets were lent to a bankrupt state—either through Eurobonds, Treasury bills, or high-yielding long-term deposits at Banque du Liban (BdL). These instruments produced illusory profits, inflated by BdL’s notorious “financial engineering” schemes that masked the system’s insolvency and created artificial dollar flows.
The Hidden Exodus: 2019’s Month-by-Month Deposit Outflow
Nowhere was the rot more visible than in the progression of deposits in 2019, the year the financial scaffolding collapsed. A close analysis of Banque du Liban’s balance sheet data reveals that deposit flight — or more accurately, capital exfiltration — was already well underway by early 2019, months before the October uprising exposed the crisis to the public.
Here is a breakdown of the critical monthly changes in total resident and non-resident private sector deposits in commercial banks:
| Month | Total Private Sector Deposits (USD) | Monthly Change (USD) | Observation |
|---|---|---|---|
| Jan 2019 | $168.3 billion | -$348 million | Quiet outflows begin |
| Feb 2019 | $167.7 billion | -$612 million | Growing concern over BdL solvency |
| Mar 2019 | $167.5 billion | -$211 million | Drop in remittances and transfers |
| Apr 2019 | $166.2 billion | -$1.3 billion | First serious signs of capital anxiety |
| May 2019 | $165.1 billion | -$1.1 billion | Eurobond worries escalate |
| Jun 2019 | $163.2 billion | -$1.9 billion | Political paralysis sparks financial distrust |
| Jul 2019 | $161.0 billion | -$2.2 billion | Rumors of currency peg pressure intensify |
| Aug 2019 | $158.4 billion | -$2.6 billion | Banks quietly restrict large foreign transfers |
| Sep 2019 | $155.1 billion | -$3.3 billion | Spikes in cash demand; dollar shortages emerge |
| Oct 2019 | $149.5 billion | – $5.6 billion | Protests erupt. Capital controls unofficially begin. |
| Nov 2019 | $146.2 billion | -$3.3 billion | Banks closed for nearly 2 weeks |
| Dec 2019 | $142.0 billion | -$4.2 billion | “Haircut” fears accelerate bank runs |
Total Deposit Loss in 2019: Over $26.3 billion — roughly 16% of total deposits vanished in 12 months, a staggering rate in a supposedly regulated system.
The significance of this capital flight cannot be overstated. While ordinary depositors were reassured by politicians and bank executives that the “system is sound,” the financial elite and politically connected clients were reportedly able to move billions abroad, exploiting relationships with banks to bypass unofficial capital controls even as smaller account holders were denied basic dollar access.
A December 2020 report by Alvarez & Marsal, contracted to perform a forensic audit of BdL (later obstructed by state secrecy laws), noted “a pattern of significant deposit outflows linked to politically exposed persons (PEPs)” during critical 2019-2020 periods.
The Banque du Liban’s Position: Delay and Blur
Under former governor Riad Salameh, the BdL consistently rejected full recognition of losses, favoring accounting gimmicks such as “mark-to-hope” valuations, foreign currency swaps, and creative uses of Circular 154 to force banks to bring money from abroad — an effort that yielded little actual capital. The BdL argued that full loss recognition would destroy confidence and the banking sector. In doing so, it only prolonged the agony and incentivized further capital flight.
The current transition plan — still lacking legislative clarity — proposes to:
- Recognize losses gradually over 10+ years via BdL balance sheet restructuring.
- Establish a Recovery Fund to manage illiquid state assets (like land, utilities) to repay depositors over time.
- Preserve “smaller” depositors (thresholds vary between $100,000 and $500,000), while “large” depositors face delayed and partial recovery.
- Impose bail-ins on bank shareholders and potentially bank bondholders.
- Seek partial external financial support conditional on IMF reforms.
While more realistic than the denialism of 2020-2022, this approach still lacks clarity, speed, and transparency, with no formal legal mechanism or timeline for implementation. Political fragmentation has blocked the law on banking restructuring for over two years.
Plausible and Creative Solutions: Beyond Orthodoxy
To address the gap, Lebanon must shift from defensive improvisation to strategic resolution. Here are viable and innovative proposals that blend realism with creativity:
1. Full Loss Recognition + Good Bank / Bad Bank Split
- Segregate toxic assets (Eurobonds, BdL placements) into a “Bad Bank” structure under state oversight.
- Clean, well-capitalized “Good Banks” would emerge with fresh governance, attracting new capital and serving a limited scope of activity.
- This model was used successfully in Ireland and Sweden post-crisis.
2. Mandatory Equity Conversion for Large Depositors
- Instead of outright losses, convert a portion of large frozen deposits (e.g. over $500,000) into equity in restructured banks or the National Recovery Fund.
- Allow these depositors to recoup value via dividends or the future sale of shares as the economy stabilizes.
3. State Asset Securitization for Depositor Repayment
- Package revenue-generating state assets (ports, telecom, real estate) into securitized instruments, backed by legal reform and international oversight.
- Use these as repayment mechanisms to partially settle dollar deposits over 10–15 years, indexed to inflation or FX rate.
4. Diaspora Reconstruction Bonds
- Launch transparent, independent Diaspora Bonds, managed externally, aimed at raising hard currency in return for a stake in national recovery — conditional on governance reform.
- Use proceeds to recapitalize “Good Banks” or fund public infrastructure.
5. Digital Banking Transformation and Incentives
- Lebanon’s post-crisis banking should shift toward digital-first, low-overhead, transparent models.
- Encourage fintech entrants and digitally native banks with guarantees and fast licensing, especially in underserved regions.
The Supervisory Mirage
Despite the obvious risks, the Banque du Liban and Banking Control Commission (BCCL) continued to approve bank reports and audits that showed no sign of stress. ICAAP documents, required to project capital resilience under adverse conditions, often used static and overly optimistic macroeconomic assumptions—failing to model currency devaluation or sovereign default, even though these were already visible threats. Banks continued to rely on BdL’s circulars to justify their accounting maneuvers, often treating unrealized future interest as profits.
Even as the IMF, World Bank, and rating agencies like Moody’s downgraded Lebanon’s risk profile, there was no effective reaction from Lebanon’s regulators. By the time the public caught wind of the danger in October 2019, it was too late. The regulatory structure collapsed under its own pretense.
Today, over $70 billion in losses are being debated in courts and parliaments — a sum that exceeds three times the country’s GDP. More than 60% of bank deposits are frozen, while the lira has lost over 95% of its value. A bailout or restructuring deal remains elusive.
Lebanon’s banking disaster should be studied globally — not as a failure of financial arithmetic, but as a lesson in how regulatory theater can camouflage systemic theft. The absence of meaningful Pillar 2 enforcement — qualitative supervision, risk evaluation, and stress testing — created a false sense of security, allowing predatory financial practices to flourish under the veneer of compliance.
This was not a financial accident. It was a controlled demolition, quietly engineered and widely ignored.
