Banking restructuring: After seven years of blocking, has Lebanon finally passed the law that will make the losses pay to those who have to pay for them?

Seven years after the collapse of the Lebanese banking system, Parliament has finally amended the Bank Recovery and Restructuring Act. Presented as a decisive step towards an agreement with the International Monetary Fund, the text nevertheless deserves to be read with much more attention than the political declarations which accompanied its adoption suggest. It contains real advances: shareholders must absorb losses before depositors, banks must be assessed individually, non-viable institutions can be liquidated, directors replaced and certain privileged transfers recovered. But it also contains ambiguities, considerable institutional powers, several deviations from the best international standards and above all a fundamental limitation: it still does not say how the huge losses accumulated since 2019 will be distributed.

The contradiction is written into the text. The new architecture is expected to restructure banks, but its execution will remain suspended until the adoption and publication of the future law on the restoration of financial order and the return of deposits, i.e. the law that must deal with the « financial gap ». Parliament has therefore built a part of the mechanism of resolution without yet deciding definitively how the bill will be distributed between the State, the Bank of Lebanon, banks, their shareholders and possibly certain categories of depositors. Yet it is this distribution that has been the heart of the conflict since October 2019.

So we must avoid two readings as misleading as one. The first would be to present the law as a mere cosmetic text intended to satisfy the IMF: it goes much further and actually changes the rules applicable to insolvent banks. The second would be to announce that the banking crisis is now resolved: it is absolutely not. The text sets out how a bank can be restructured or liquidated once its actual losses have been determined. It still does not determine, on its own, the real economic value of the tens of billions of dollars in debt that banks hold on the Bank of Lebanon.

This is essential because it refers directly to the seven years lost since the beginning of the crisis. Throughout this time, Lebanon has not lacked international diagnostics, plans or proposals. What he missed was a political agreement on an extremely concrete question: who had to pay. The battle opposed governments, the Bank of Lebanon, the Association of Banks of Lebanon, political parties, parliamentarians, depositors and IMF, each challenging to different degrees the way in which losses were recognized or distributed. The result of these blockages was much less abstract than the accounting disputes that accompanied them: depositors were deprived of their money, credit collapsed, the pound lost most of its value, the economy was largely dollarized and the banking system continued to exist legally without functioning normally.

2019: the collapse that nobody wanted to officially recognize

The Lebanese banking crisis did not arise on the day the banks closed in October 2019. For years, the financial model had been based on the continuous influx of currencies from the diaspora, investors and depositors attracted by remunerations often far higher than those available abroad. The commercial banks then placed a considerable share of these resources with the Bank of Lebanon, which used them to maintain monetary stability, finance the country’s needs and support a chronically deficit state.

This model worked as long as enough new dollars entered the system. When such inflows slowed down and then stopped offsetting outflows, accumulated liabilities became impossible to meet normally. Starting in autumn 2019, banks temporarily closed down and then restricted withdrawals and transfers to abroad without the adoption of a genuine uniform capital control law. An applicant could continue to read on his statement that he owned $100,000 while discovering that it was impossible for him to withdraw or transfer the same $100,000 freely.

From there, part of the restructuring was carried out without ever bearing that name. Bank withdrawals at rates far from the market, institution-specific restrictions and circulars have gradually reduced the economic value of old bank claims. Some depositors in need of cash have accepted significant haircuts; Others used partial withdrawal mechanisms; Others waited. The bank balance sheet continued to display nominal claims which no longer necessarily corresponded to what their holders could actually recover.

This mechanism had a central consequence: by refusing for several years a formal restructuring of the balance sheets, Lebanon did not prevent losses. It simply allowed their distribution to be done in an opaque and often deeply unequal manner. People with fresh income in dollars, assets abroad or privileged access to transfers could absorb the crisis better than employees, pensioners, small businesses or depositors who placed most of their assets in a Lebanese bank.

The World Bank was later to use an exceptionally severe formula for an institution of this nature by speaking of « voluntary depression ». She stressed that the magnitude of the collapse could no longer be explained solely by a bad situation, but also by the inability of leaders to adopt and implement a credible recovery strategy. Between 2019 and 2021, nominal GDP in dollars had contracted dramatically while the population was gradually bearing the cost of adjustment.

2020: when restructuring could have started

Hassan Diab’s government adopts a financial recovery plan in April 2020, which tries for the first time to look at the losses in front of it. The principle was not particularly revolutionary with regard to international banking restructuring: to identify the losses of the State, the Central Bank and commercial banks, to restructure insolvent institutions, to recapitalize those who could survive and to negotiate with the IMF assistance that could accompany the whole process.

Yet it is at this moment that the confrontation really begins. Government estimates of losses are contested by the Bank of Lebanon, banks and several parliamentary forces. The differences were becoming so important that the Lebanese delegation was not even able to maintain a common position on the extent of the financial gap. Discussions simmer as the crisis continues to destroy the value of deposits and money.

The term « sabotage » should be used with caution when assigning specific intent to the various actors. But the blockage of the 2020 plan is widely documented. Reuters will later report that the project had been torpedoed by powerful political forces, the Central Bank and commercial banks that challenged the distribution of losses. Two key figures involved in the process, Chief Financial Officer Alain Bifani and Councillor Henri Chaoul, then left their posts, denouncing the inability to carry out the reform.

The stakes already exceeded a simple technical divergence on an Excel sheet. Recognizing bank losses meant recognizing that the capital of some institutions had been destroyed. In financial law, however, equity is precisely the first buffer to absorb losses. Where the real value of the assets becomes less than that of the liabilities, shareholders cannot normally claim to maintain the value of their interest intact while transferring the difference to the State or depositors.

It is this question that explains much of the resistance observed afterwards. Rapid restructuring in 2020 would probably have destroyed or severely diluted holdings in several banks, led to mergers, disappeared institutions and imposed massive recapitalisation. Removing the decision temporarily maintained the property architecture of the banking system, but at the cost of a continuous destruction of its economic function.

The battle for State responsibility

The position of the Association of Banks of Lebanon cannot be reduced to the caricature of a private sector simply seeking to pay nothing. Its main argument is based on a reality: commercial banks placed considerable amounts with the Bank of Lebanon and financed directly or indirectly a State that accumulated deficits and debt. The Lebanese State itself lacked on its Eurobonds in March 2020, while the Central Bank was unable to return normally all the currencies entrusted to it.

From the banks’ point of view, therefore, a major part of the losses originate in the State and the BDL. They therefore believe that restructuring that would remove their capital and impose most of the bill on them without sufficiently recognising the State’s obligations would mean making them solely responsible for a financial policy in which all public authorities took part.

This objection has an undeniable part of truth. Lebanon is not simply going through a series of private bank failures comparable to those of institutions that have granted bad real estate loans or speculated on risky assets. It is experiencing an interlocking crisis of the State, the Central Bank and commercial banks. The three balance sheets are linked, and pretending to save one without treating the other two makes no sense.

But it is precisely from this reality that differences begin. ABL has consistently defended a larger contribution from the State, either directly or through future revenues from certain public assets. Several proposals envisaged the creation of a fund of State-owned assets or income to contribute over a long period of time to the repayment of depositors.

The problem is then moved rather than removed. A public asset belongs collectively to the population. A public company, land, infrastructure, future state income or natural resource are not money that appeared spontaneously. Mobilizing the public wealth to replenish the commitments of the banking system is therefore tantamount to transferring part of the losses from the bank balance sheets to the collective wealth.

This is precisely one of the points on which the IMF has opposed several approaches defended in Lebanon. The Fund does not exclude a State contribution. On the other hand, the Panel considers that debt sustainability should remain compatible with the sustainability of the debt and should be addressed after the recognition of losses and the application of the normal hierarchy of creditors. Shareholders must lose their capital before the taxpayer is called upon to recapitalize a private bank.

Different interests behind the common defence of « deposits »

Political confusion persisted for several years around the slogan of deposit protection. Banks, depositors and politicians could all claim to defend Lebanese savings without defending the same interests. The owner of a bank wishes to protect his capital and possibly retain his control. The applicant wishes to recover his claim. The state must avoid turning private losses into such a large public debt that it would prevent for decades from financing public services.

These interests may converge but they may also be contradictory. Saving the full shareholders of a bank by putting its deficit on the state budget is not necessarily defending depositors. On the other hand, brutally liquidating all banks without the continuity of deposits and credit would obviously not be a solution.

The starting point of international standards is precisely to put an end to this confusion. A bank’s capital is used to absorb losses. Shareholders are remunerated when the institution realizes profits because they take that risk. Their investment is not a guaranteed deposit. When the bank becomes insolvent, their capital must therefore be absorbed before legally higher claims.

The new Lebanese law finally clearly spelled out this logic. This is probably the most important step forward, and one of the reasons why the current text is much more serious than maintaining the status quo that Lebanon has become accustomed to since 2019.

2022: an agreement with the IMF that will never be transformed into a programme

On 7 April 2022, the Lebanese authorities and IMF services reached a preliminary agreement on a programme of approximately $3 billion over 46 months. The announcement gives rise to hope for a gradual exit from the crisis, but it is often misinterpreted. The three billion is not an immediate cheque: the agreement still needs to be validated by the Fund’s Board of Directors, which requires Lebanon to carry out a number of reforms previously considered essential.

These include banking restructuring, improving bank secrecy to enable audits and accountability, assessing large banks, developing a loss strategy, improving public finances and several structural reforms. Much of these actions remain blocked or very delayed. The programme therefore never reaches the IMF Board of Directors and the corresponding money is not released.

Presenting this episode as an IMF refusal to assist Lebanon reverses the timeline. Lebanon had negotiated a conditional agreement and did not meet the conditions for its transformation into a final programme sufficiently quickly. Moreover, the deadlock does not mean that any international assistance has ceased: the World Bank, donor countries and international agencies have continued to fund social, humanitarian, institutional or infrastructure programmes. What has failed is the return to macroeconomic financing that is sufficiently important to accompany the restoration of the financial system.

And the stakes far exceeded three billion dollars. An IMF agreement often functions as a certificate of economic coherence that can unlock other financing, facilitate debt restructuring, reassure investors and allow bilateral or multilateral institutions to take more risks. The cost of blocking reforms since 2022 cannot therefore be summed up by the three billion outstanding. It is also measured in unrealised investments, inaccessible external credit and years of recovery lost.

Why donors refused to finance the hole

The reasoning of the international partners was relatively simple. Injecting billions of dollars into a banking system whose losses had not been clearly recognized could replace the former missing currencies with international public funds without changing the structure that led to the crisis. If the new resources were used directly or indirectly to replenish insolvent balance sheets before their shareholders absorbed their losses, the IMF and other donors would de facto finance the rescue of former owners.

It is also for this reason that the debate on external aid cannot be separated from the debate on losses. The country had already benefited, prior to the crisis, from numerous international support conferences. In particular, CEDRE in 2018 mobilized more than $11 billion in loans and potential grants primarily for infrastructure, subject to reforms. Essentially, it has never been effectively mobilized as planned because the conditions for governance and reform have not been sufficiently met before the financial collapse completely upset the priorities.

After the crisis and after the war, the needs are even greater. The State must rebuild infrastructure, finance its administrations, the army, electricity, public services and social protection. It would be difficult to defend it at the same time to impose tens of billions of new bonds in order to fully reconstitute the bank balance sheets without private capital bearing its share of the losses.

This is what the IMF calls debt sustainability. Behind this technical expression is a very concrete political question: how many future taxes, sacrificed public services or mobilized public assets should be devoted to the repayment of the past if the State were to take over an excessive share of the banking hole?

Seven years later, what does the new law really do?

The text amending Law 23 of 2025 now creates a much closer architecture to a modern banking resolution regime. It is no longer simply a matter of asking a bank in difficulty to seek additional capital or impose a regulatory sanction. A specific authority may determine the institution’s default, take control of its restructuring, change its governance, sell assets, transfer certain liabilities, organise its recapitalisation or decide that it should be liquidated.

The decision is based in principle on an assessment of the actual situation of the bank. The Bank Supervisory Board must determine whether the institution is failing or likely to fail by examining, inter alia, its capital, liquidity, ability to settle its liabilities, profitability and compliance with the conditions of authorisation. Where these criteria are no longer fulfilled and normal prudential measures are no longer sufficient, the case may be referred to the High Bank.

This is a major change because the Lebanese crisis has precisely demonstrated the weakness of a model in which banks could remain legally open while being unable for years to normally honour their commitments to their customers. The new law theoretically allows us to leave this grey area: a viable bank must be recapitalised and resume normal activity; A bank that cannot be saved must be liquidated.

A real hierarchy of losses

The Schedule to the Act explicitly sets out the rank of capital and creditors to bear the losses. This hierarchy is essential because it prevents restructuring from being decided according to the current political power ratio.

This architecture is one of the strongest points of the reform. It clearly states that shareholders’ capital must disappear before ordinary depositors are called upon to absorb losses. It also places the deposits of certain shareholders and officers below ordinary deposits, which answers the particular question of those who could have accumulated the status of owner, officer and creditor of their own establishment.

This does not mean that all applicants are 100% guaranteed. Their superior rank in the hierarchy protects them from shareholders and junior creditors. While the losses are large enough to absorb the previous categories as well, the issue of treatment of the largest deposits reappears. That is precisely what the law on the restoration of financial order will have to decide.

The lease-in, finally enshrined in Lebanese law

In particular, the High Bank may use internal bail-in or bail-in. The mechanism is to reduce the value of certain claims or convert them into capital to recapitalize the bank without automatically using public money. It became one of the central instruments of modern resolution regimes after the global financial crisis of 2008, when several States had spent considerable sums to save their banks.

It also provides for the possibility of bringing in new investors, transferring all or part of the assets and liabilities to another institution or organising a merger. These instruments can be combined. This would allow a bank to have its old capital completely cancelled, some receivables absorbed, its healthy assets transferred and a new structure recapitalized by new investors.

Changing philosophy is essential. A resolution procedure is not intended primarily to preserve the name, owners or board of directors of a bank. It aims to preserve useful economic functions: payments, access to accounts, credit to enterprises and the stability of the system. A bank can therefore legally disappear without its necessary activities being interrupted.

Former shareholders will no longer be able to regard their bank as an untouchable property

The law allows for recapitalisation by new investors and does not guarantee the possibility for former shareholders to retain their rights. Some minority shareholders who did not exercise control may nevertheless be allowed to participate in recapitalisation, while wider participation by former owners is conditional on the future framework of the law on the restoration of financial order.

This distinction is relevant. It would be difficult to justify permanently excluding a small shareholder who never participated in management decisions solely because he had a small stake. But allowing former controlling shareholders to clear the losses of their establishment and then immediately regain control once the invoice is borne by others would amount to privatizing profits and socializing losses.

It will therefore depend on the rules of application and the assessment of the concept of effective control. This is one of the areas in which future restructuring will need to be examined bank-by-bank rather than through a collective approach to the sector.

Independent evaluators: major progress, provided they can really work

The text provides for evaluations to be carried out by independent bodies selected from recognized international institutions in accordance with international standards of valuation and financial reporting. The bank concerned may challenge certain material or factual errors, but the procedure is regulated within short periods of time in order to prevent urgent restructuring from being paralysed by appeals for several years.

This is in the right direction. A serious restructuring cannot begin as long as no one knows exactly what each bank is worth. Credit, real estate, equity, government debt, Eurobonds and, in particular, investments with the Bank of Lebanon must be reassessed.

But this is precisely where the main economic weakness of the text appears. Article 28 shall temporarily maintain a special method for the accounting of assets placed with BDL. These assets are recorded at their book value, with provisions to cover potential losses deducted. The actual scope of this rule therefore depends entirely on the value of the provisions withheld.

Article 28: the risk of keeping fictitiously solvent balances

Let us take a voluntarily simplified example. A bank has ten billion dollars in debt owed to the Bank of Lebanon. If the Central Bank can only economically return five billion, the bank actually holds a potential loss of five billion. If, however, its balance sheet continues to value the debt at ten billion with insufficient provision, the institution will seem much more solvent than it really is.

All bank restructuring can be distorted by this accounting assumption alone. A truly insolvent bank could appear viable and avoid significant recapitalisation. Conversely, immediately recognizing the real loss could absorb all its capital and force it to seek new investors or disappear.

This is why article 28 is probably one of the provisions that will have to be monitored most closely. The Act itself provides for its transitional nature and repeal upon the entry into force of the Financial Order Restoration Act. This implicitly shows that the issue of the value of claims on the BDL is still not definitively settled.

The IMF has been insisting on prior and credible recognition of losses for several years. A bank restructuring based on assets recognized at a value that their debtor cannot actually repay would not constitute a restructuring: it would simply prolong the accounting illusion that exists since 2019.

A contradiction in the treatment of deposits

The text also contains an ambiguity which deserves more attention than it received during the public debate. The principle of reorganization article states that the lease-in does not apply to customer deposits. Taken in isolation, the principle seems particularly protective: deposits could not be reduced or converted into capital as part of a traditional internal bailout.

However, another provision allows the High Court, in certain exceptional circumstances, to deviate from equal treatment between creditors of the same rank, including the transfer of equity deposits or their reduction in value where such a measure would be necessary to preserve a bank quickly or avoid a systemic crisis.

For the applicant, the legal distinction may seem artificial. If $200,000 on a $500,000 deposit is converted into shares, the economic result is a risk absorption by the depositor, even if the legislator chooses not to call the transaction « leasing-in ».

This contradiction should be clarified, preferably by the legislator himself rather than by a future circular. A resolution regime must be predictable. Depositors and investors need to know in advance what categories of receivables can be reduced, under what circumstances and up to what amount.

The big taboo: can we really promise 100% of all deposits?

The Lebanese debate remains largely dominated by the formula that deposits must be returned in full. Morally and legally, the claim is understandable: savers have entrusted their money to banks and have a claim on them. But the recognition of a right does not automatically create the assets necessary for its payment.

If all the actually recoverable assets of the State, the BDL and the banks are below the value of their liabilities, the difference must necessarily be borne by someone or spread over a very long period. You can change the schedule, issue bonds, transfer assets or promise future revenues; a loss cannot be eliminated simply by refusing to enter it in the accounts.

This is where the difference between the protection of small depositors and the absolute guarantee of all deposits appears. Protecting a person with $30,000 or $80,000 in savings does not have the same economic cost as immediately and fully guaranteeing a tens of millions of dollars account. The IMF therefore insists on the maximum protection of small depositors while maintaining the principle of creditor hierarchy.

If it is decided otherwise that all deposits, whatever their size, will be fully secured even after the loss of capital and other creditors likely to absorb losses, the source of the tens of billions that are missing must be identified. If this source becomes the State, the full protection of the large depositor is transformed into a public debt borne by the entire population.

The High Bank: a powerful authority and questionable independence

The Act assigns a central role to the High Banking Authority, whose second chamber will be responsible for restructuring and liquidation decisions. It is chaired by the Governor of the Bank of Lebanon and includes two vice-governors, the Director General of Finance, a judge and experts.

There is a clear advantage in the scheme: the Central Bank and the supervisory authorities normally have the necessary information and technical skills to act quickly when a bank fails. In several foreign systems, resolution is effectively entrusted to the central bank or to an authority extremely close to it.

But the Lebanese situation makes the issue more sensitive. The BDL is not external to the crisis that it must help solve. A large part of the bank assets correspond precisely to claims on it. Its own losses and liabilities are part of the financial gap. It is therefore in the position of major debtor of the banking system while exercising a decisive role within the authority responsible for deciding which banks are viable.

The law provides for conflict of interest rules and the participation of experts. This reduces the risk without eliminating it. The actual operational independence of the authority will need to be assessed in practice, particularly when a restructuring decision will involve recognition of a significant loss in a claim against the Central Bank.

The debate is all the more sensitive as the experience of previous years has profoundly weakened confidence in banking supervision. An authority may have considerable powers on paper; If it does not exercise them against the best connected institutions or if it applies different assumptions according to the banks, the best law in the world will remain ineffective.

Conflicts of interest better framed, but a strange threshold of $100,000

Members of the Forum must declare their interests and may not, in particular, have recently been shareholders, directors or advisers of the bank under review. Family relations are also taken into account. These provisions are an essential improvement in a sector where the links between finance, politics and business families are particularly close.

However, the text retains a threshold of $100,000 for certain deposits or borrowings that may affect the independence of a member. The logic can be challenged. For example, a person with $80,000 in the institution that he or she must contribute to liquidating objectively retains a personal financial interest in the outcome of the decision, even if it remains below the legal threshold.

A more cautious approach would have been to impose a systematic declaration of any significant financial exposure and a challenge based on the reality of interest rather than on a uniform threshold. One hundred thousand dollars can be negligible for a very wealthy person and represent most of another’s wealth.

The principle « no creditor more ill-treated »

The law also introduces important protection based on international standards: a creditor must not find himself, as a result of the restructuring, in a situation more unfavourable than that which he would have experienced in liquidation. Where he can prove otherwise, he may apply to the special court for compensation corresponding to the difference.

This mechanism, known internationally under the No Creditor Worse Off principle, allows the resolution authority to be given sufficient freedom to save the essential functions of a bank without allowing it to arbitrarily defraud a class of creditors.

But its effectiveness depends once again on the valuation of assets. To calculate what a creditor would have received in liquidation, the real value of the bank assets must be determined. An artificially high or low valuation of BDL claims would mechanically change the amount of compensation.

The law and accounting are therefore constantly joining in this reform. Legal protections are real, but their practical value will depend on the financial assumptions.

Preferred transfers after October 2019: an explosive arrangement

The Parliamentary Commission reintroduced into the text the obligation to return certain funds transferred abroad after 17 October 2019 when they were in a discriminatory, unfair or unfair manner to the detriment of other applicants who did not have access to the same possibilities.

Politically, the provision answers a question that has poisoned Lebanese society since the beginning of the crisis: have some people been able to raise considerable sums thanks to their relationships at the same time as the other customers were blocked? If such transfers have effectively reduced the liquidity available to all depositors, their recovery may be considered a measure of equity.

But the text must be applied with great precision. All capital outflows after October 2019 are obviously not fraudulent or privileged transactions. Companies have had to pay their suppliers, families have to fund students, patients have to pay for care or individuals have to honour legitimate commitments.

The concept of « unfair » or « inequitable » is therefore too broad if it is not accompanied by objective criteria. The relationship with the bank will have to be established, the possible existence of preferential treatment, knowledge of the financial situation, the nature of the transaction and the damage caused to other creditors. Without these precautions, a provision to recover unfair benefits could become a source of endless litigation.

Ten years of responsibility for officers and directors

The law also permits actions in Lebanon or abroad against certain large shareholders, directors, officers, signing officers and auditors of the previous 10 years where there are reasonable grounds to suspect civil or criminal liability. Amounts paid in violation of the law or rules of good governance may also be the subject of restitution requests.

This mechanism is particularly important in the Lebanese context. A restructuring that merely erases the old banks and then distributes losses among the population without considering the decisions that led to insolvency would be politically difficult and economically dangerous. It would set a precedent for managers to take significant risks, collect dividends and earnings in the right years, and then pass on losses to the public when the system collapses.

The difficulty will be this again. The pursuit of responsibility must not become a collective hunt against all banking administrators, but it cannot be further restricted to those with the least political protection. Audits, the lifting of bank secrecy and access to documents should make it possible to establish concrete decisions, possible conflicts of interest, transfers and individual responsibilities.

Immunity probably too generous for resolution authorities

To enable those responsible for restructuring a bank to act quickly without fear of systematic prosecution, the law provides them with important legal protection. The High Court, the Supervisory Commission, the Interim Director, the liquidators and certain persons working with them cannot be held liable except in particular for fraud, bad faith or gross misconduct.

The principle is perfectly understandable and is reflected in international standards. An authority could not close a bank on Friday night if each of its members feared that they would be personally prosecuted by the former shareholders for twenty years.

But the extent of the Lebanese mechanism deserves to be monitored. Protection must never become an institutional irresponsibility. The more extraordinary powers an authority receives – cancel actions, amend contracts, freeze proceedings, transfer billions of assets – the stronger the obligations of transparency, motivation of decisions and judicial review.

The Special Banking Court: necessary speed, rights to preserve

The decisions of the High Court may be challenged in a special banking court, but the appeals do not automatically have suspensive effect. This logic corresponds to the very nature of a bank resolution. When a bank is on the verge of collapse, waiting several years for appeals to be finally judged may be sufficient to destroy the value that remains to be preserved.

The law also protects transactions already carried out with good faith third parties even when a decision is subsequently annulled. Again, the principle is consistent: if a healthy part of a bank has been transferred to another institution, it would be extremely dangerous to be able to cancel the whole operation retroactively several months later.

In return, the injured person must be able to obtain compensation. The challenge will be to make this court sufficiently competent and independent to deal with the most complex financial cases that the Lebanese judiciary has ever encountered.

What is still missing from international standards

The text is a real approximation with best banking resolution practices. However, we must not confuse reconciliation with perfect compliance. The standards developed after the international financial crisis cover a much broader scope than the mere possibility of leasing or liquidating a bank.

In particular, the absence of a sufficiently explicit system of relay banks is regrettable. In a large bank bankruptcy, it may be necessary to immediately transfer deposits, means of payment and good assets to a temporary establishment created by the authority, the time to find a buyer. The Lebanese text largely permits transfers, but does not build this instrument in such detail.

The same is true for a defancy structure designed to isolate the most problematic assets. These tools could possibly be created from the general powers provided by law, but an explicit legal basis would have provided more security.

The forgotten problem of financing the resolution

Restructuring a bank does not only require the allocation of accounting losses. Sometimes it is necessary to finance temporarily the establishment or structure that resumes its essential activities. A bank can be economically viable after recapitalisation while temporarily lacking liquidity.

International schemes generally provide for specific mechanisms, such as the deposit guarantee fund, the banking sector or later recoverable public schemes. The Lebanese text remains much less precise on this issue.

This can become a very concrete problem. If a bank has to transfer billions of deposits to another institution but the corresponding assets are not immediately liquid, who provides the cash that allows new customers to access their money? The BDL? State? The other banks? A special fund? The law does not provide this answer with sufficient clarity.

Did the IMF really approve the law?

The parliamentary file contains a letter from the IMF Resident Representative dated 19 June 2026. She indicated that the amendments contained in the government bill help bring the law into line with international best practices in banking resolution. This is an important support for the work of the government.

But this letter must not be transformed into a general certificate on the text finally adopted by Parliament. It concerns Decree No. 3056 adopted by the Council of Ministers on 30 April. The Finance Committee then amended several provisions, notably during its work in July and August.

The own parliamentary report indicates that the IMF had approved the government’s version and that parliamentarians then continued discussions and amended several articles. It would therefore be excessive to state, on the sole basis of the file available, that each subsequent amendment received specific formal approval from the IMF.

This nuance is all the more important as the Fund had again expressed in 2025 reservations about the first banking law, in particular its alignment with international standards and guarantees against conflicts of interest. The 2026 amendments respond to some of these criticisms, but the real test will be the IMF’s next overall assessment, especially when it simultaneously examines the banking resolution and the Financial Gap Act.

The text can be good and the restructuring bad

One of the common mistakes is that a good law will automatically produce a good restructuring. That’s not true. The main outcome will depend on assessments, appointments, decisions of the High Court and how the rules will be applied bank-by-bank.

Voluntary undervaluation of losses would allow certain banks to be artificially kept alive. An insufficient provision on BDL claims would give a false picture of the capital available. A generous valuation of assets held abroad could produce the same result. Conversely, overly pessimistic valuation could result in liquidation that would not have been necessary.

Governance will therefore become as important as the text. Evaluator reports should be sufficiently transparent to understand why a bank is saved and another liquidated. The criteria will not change depending on the identity of its owners.

The greatest risk would be to build a technically modern law and then to reproduce the old system through its application: to protect politically close banks, to absorb losses to the least influential actors and to retain the same owners after a recapitalisation financed directly or indirectly by the public.

How many banks are going to disappear?

The law does not set any number and it would be premature to announce one. The restructuring must make it possible to evaluate each institution individually. Some banks may have foreign assets, capital or new investors sufficient to survive. Others will have to merge. Some will probably be liquidated.

The sector will almost certainly be smaller. It’s not necessarily bad news. Before the crisis, Lebanon had a very high number of banks for an economy of its size, but they were largely exposed to the same risks: the Lebanese State and the Bank of Lebanon. The multiplication of the signs had therefore not created the diversification that their number might have suggested.

A system composed of fewer but properly capitalised, supervised and able to finance the economy would be much more useful than a large number of banks unable to return deposits normally.

What will happen to shareholders

For the owners of the most fragile banks, restructuring can be extremely brutal. Where losses exceed capital, the old shares may lose all of their value. The investor was not « expropriated » in the economic sense: its assets were already worth zero or almost zero because the bank’s liabilities exceeded its assets.

In other institutions, shareholders can be very heavily diluted. A bank that requires a billion dollars of new capital will see new investors become the majority in exchange for the funds brought.

This change is essential to restore market discipline. If the owners of a bank know that the state will always save them when they take bad risks, they have an interest in maximizing profits during the right periods without sufficiently integrating the cost of a future failure.

What will happen to employees in the banking sector

Restructuring will also have a social cost which must not be hidden. Mergers and liquidations are likely to result in further agency closures and job losses. The Lebanese banking sector has already significantly reduced its workforce since 2019; formal restructuring will likely prolong this contraction.

The profiles sought will also change. Surviving banks will need to invest more in risk control, compliance, cybersecurity, audit and digital services. The model of an extensive network of agencies that mainly intermediate between depositors and the Central Bank probably belongs to the past.

Banking restructuring should therefore also be treated as an industrial restructuring, with its impact on employment and training.

What it changes for a small depositor

For a depositor with a relatively small amount of money, the reform should theoretically significantly improve protection if the future law complies with the IMF and the government’s guidelines. Small deposits are the category that international authorities seek to protect as a priority, and their ranking in the new hierarchy is much higher than that of shareholders and junior creditors.

The main benefit would be to emerge from the current uncertainty. Since 2019, an applicant can own a nominal claim without knowing the actual repayment schedule. Restructuring would enable the available part to be determined immediately, the part gradually repayable and the guarantees corresponding to the balance.

Official recognition of a calendar may seem less satisfactory than the abstract promise of immediate full reimbursement. But it is much more useful than an account with an inaccessible theoretical amount for seven years.

What it changes for a large depositor

For deposits of several hundred thousand or millions of dollars, the situation will be more complex. A party may be returned according to the same mechanism as small depositors, while the balance may be converted into long-term securities, shares or other instruments as the Financial Gap Act will make a final decision.

This is where the risk of a new financial illusion must be avoided. Transforming a $5 million deposit into a very long-term bond is not equivalent to repaying $5 million. The economic value of the bond will depend on its maturity, interest rate, the quality of its debtor and the assets that guarantee it.

A nominal security of four million dollars payable in twenty years can be worth far less than four million today. Any solution must therefore present applicants not only the nominal value of what they receive, but also its likely economic value.

Restructuring can finally bring credit back

However, the most important consequence of the reform is rarely the one that dominates the debate. A bank does not exist only to keep past savings. It must transform this savings into financing the economy.

Since the collapse, traditional bank credit has almost evaporated. A company wishing to buy a new machine must often raise its own funds. An entrepreneur with no initial assets has very few financing opportunities. Long-term real estate loans no longer work as before the crisis.

This situation favours an annuitant economy with already cash and penalises social mobility. A wealthy person can buy a cash apartment, invest in a business, or finance a business. A young household or contractor with a good project but little capital can no longer borrow normally.

The return of credit could therefore have far greater economic effects than the simple restructuring of old deposits. This is also one of the reasons the IMF considers banking reform to be essential for recovery.

Get out of cash economy

Lebanon has been transformed since 2019 into an economy largely based on cash and the dollar. This adaptation has allowed the trade to continue to function despite the bank collapse, but it has many costs. Payments are less traceable, tax collection becomes more difficult, money laundering is easier and businesses have less access to bank financing.

However, the return of funds to banks will not be automatic after a law is passed. The trust lost in a few months can require a generation to be rebuilt. A person who has spent seven years fighting to recover his own money will not necessarily deposit hundreds of thousands of dollars in an institution only because Parliament has passed a new text.

The first condition will therefore be the concrete success of restructuring. New depositors will have to find that the rules are applied uniformly, that the new dollars are actually available and that the Central Bank can no longer use bank resources to finance the government’s deficits indefinitely.

The likely end of the banking model before 2019

Even in the event of complete success, the banking sector emerging from the crisis will probably not be able to replicate the previous model. The Lebanese banks had built a very important part of their profitability on relations with the State and the Bank of Lebanon. High rates were used to attract new currencies which were then placed at high yields in the public system.

This circle could generate considerable profits as long as capital continued to enter. However, it made the whole sector dependent on the same source of sovereign risk. When the State and BDL lost their ability to meet their commitments normally, almost all banks were affected simultaneously.

The future model will have to be much more commonplace, which would in fact be good news: collecting deposits, assessing credit risk, financing businesses, households, industrial, technological, tourism or real estate projects and charging these services at a price corresponding to the real risk. The bank will have to become a bank again rather than a state financing channel.

Foreign investors could come back, but not on promise

Credible restructuring can also make the sector attractive to foreign investors. Today, buying a Lebanese bank is extremely difficult to value because the real value of its assets remains uncertain. If the losses are finally recognized, the price becomes computable.

An investor may agree to buy a bank that has lost 80% of its old value provided that it knows exactly what it owns, what it owes and what regulation it will apply. It will accept much less easily an institution with billions of assets whose value depends on future political negotiations with the Central Bank.

Restructuring could therefore paradoxically attract more capital than artificially maintaining current balance sheets. The transparency of a loss is better for an investor than the uncertainty of a fictitiously intact asset.

The Financial Gap Act will be the real battlefield

All the architecture voted leads finally to the next step. The law on the restoration of financial order will have to determine what the banking law voluntarily leaves in suspense: the amount of the losses and their allocation.

It is on this text that the opposition of the ABL and its allies will probably be the strongest, because the resolution law mainly defines a procedure while the law on the financial gap will really determine who loses how much.

The danger of delayed socialization of losses

In particular, it will be necessary to monitor the mechanisms that could give the impression of fully protecting applicants while discreetly transferring the invoice to the State. An obligation issued by the BDL and guaranteed directly or indirectly by public revenues remains, economically, a form of potential public liability.

If the Central Bank promises repayments that it cannot finance with its own income, the State will sooner or later be called upon to intervene. The difference then consists only in deferring the recognition of this debt for several years.

A sound restructuring must therefore prevent Lebanon from reproducing the mechanism that led to the crisis: masking an imbalance present by the promise of future incomes that no one can guarantee.

Who won seven years delaying restructuring?

The question finally deserves to be asked because it enables the political cost of blocking to be measured. Small depositors did not win. They lost access to their savings and often agreed to haircuts. Employees have not earned: their real income has collapsed. Companies have not won: credit has disappeared. The state did not win: its revenues and services collapsed.

However, some actors have benefited from time. Those who had assets in fresh dollars, foreign revenues or opportunities to transfer funds were better protected. For several years, some banks have avoided immediate recognition of their insolvency and the disappearance of their former capital. Some debtors have repaid loans in heavily impaired bank dollars. Real estate or corporate assets have changed hands in a deeply unbalanced economy.

This reality does not mean that a single group would have organised the whole crisis or benefited uniformly from its continuation. It simply means that the status quo was not neutral. Every year without restructuring already redistributed wealth.

Restructuring does not create losses: it reveals them

This is probably the most important point to remember when the discourse that reform « destroys banks » begins. Restructuring does not make an institution that was previously sound insolvent. It notes that its assets are no longer sufficient to cover its commitments and organises the consequences of this situation.

A bank that has blocked deposits for seven years, almost no longer provides normal credit and has massive claims on a debtor who is unable to repay them immediately is already in crisis. Maintaining its name, board of directors and licence does not change this reality.

The risk of bad restructuring obviously exists. Misapplied law can unnecessarily destroy value. But using this risk as an argument for a permanent absence of restructuring amounts to confusing the disease with its diagnosis.

Significant but far too late reform

The comparison between the recommendations made in 2020 and the law finally adopted in 2026 is cruel. Much of the principles discussed today were already identified at the beginning of the crisis: recognizing losses, restructuring banks, absorbing losses by capital, protecting small depositors, recapitalizing viable institutions and liquidating others.

The country lost six to seven years before building the corresponding legal architecture. Meanwhile, the losses did not wait for the legislator. They were gradually absorbed by devaluation, unfavourable withdrawals, economic contraction and impoverishment.

The World Bank had described this trajectory as a deliberate depression. The term takes its full meaning when it is observed that some of the decisions finally presented as historical reforms in 2026 correspond to mechanisms that could have started to be implemented several years earlier.

Parliament’s vote does not end anything

The law of banking restructuring is an undeniable step. For the first time, Lebanese law has a much more comprehensive system for removing the capital of an insolvent bank before reaching depositors, replacing its directors, transferring its assets, merging or liquidating it. Mechanisms for the recovery of funds and accountability are introduced, as well as judicial guarantees based on international standards.

But the text also contains serious weaknesses. The High Court’s dependence on the Bank of Lebanon raises a question of independence. Transitional valuation of BDL claims may delay the recognition of losses if provisions are insufficient. The treatment of deposits contains an ambiguity between formal exclusion from the lease-in and the possibility of conversion or reduction in certain circumstances. The concrete financing of a resolution is insufficiently detailed, while some international tools such as the bridge bank or defacilitating structures are not organised as clearly as they might be.

Above all, the law itself refuses to claim that it is the definitive solution. Its implementation depends on the adoption of the Act on the restoration of financial order and the return of deposits.

So everything goes back to the same question as in 2020.

Who will pay?

Shareholders must now be the first. This is an essential step forward. Banks will then have to recognise their losses and seek capital. The Bank of Lebanon will have to show what it can actually repay. The state will have to determine what contribution it can make without turning bank bailout into taxes and debt for a generation. Small depositors should be protected to the maximum. Large depositors will need to know the form and timing of their remaining claims.

After seven years of crisis, there is no longer any solution to allow anyone to lose anything.

The only question is whether Lebanon will finally allocate the losses according to the responsibility, risk and capacity of each, or whether it will invent a new way of repelling them over time.

The reform must therefore be judged, not the number of communiqués announcing that an IMF requirement has been met. A resolution law can give the country the tools to rebuild its banks. It cannot create the tens of billions of dollars lost.

The real test will begin when the first bank is valued, its losses will be publicly recognized and whether its shareholders are actually expected to absorb them before the depositor and the taxpayer. It is at this time, and only then, that we will know whether Lebanon has actually reformed its banking system or whether it has simply adopted a new law to preserve the old one.

Sources

The reference text used for the analysis is the full French translation of Decree No. 3056 and of the draft amending Law No. 23 of 14 August 2025, including the text adopted by the Finance and Budget Committee, the annex setting out the hierarchy of equity, creditors and depositors, the government statement of reasons, the parliamentary report, the letter from the Governor of the Bank of Lebanon and the letter of the IMF resident representative of 19 June 2026. The document states that the official Arabic text remains legally enforceable only. The loss hierarchy and the treatment of deposits are set out in Annex 1. The restructuring powers, lease-in, transfers and recapitalization are defined in the provisions on the reorganization instruments and powers of the High Court. The transitional prudential regime and the suspension of enforcement until the Act on the restoration of financial order are set out in articles 28 and 29.

For the international and historical context: International Monetary Fund, service level agreement with Lebanon of April 2022 and successive communications on bank restructuring; IMF mission of June 2025; IMF visit of September 2025; mission of February 2026 on restructuring strategy and debt sustainability. (IMF) World Bank,Lebanon Economic Monitorand work on the Deliberate Depression, as well as data on economic collapse since 2019. (World Bank) Reuters, archives relating to the 2020 recovery plan, its blocking by political forces, the Central Bank and the banking sector, differences with the Association of Banks and more recent debates on the law of the financial gap. (Reuters) The 2025-2026 debates on the distribution of losses, the possible contribution of the State and the opposition of banks are also documented by the Financial Times. (ft.com)