Will Lebanese banks be merged?

Yvonne Anwar Souaibi wrote in Asas Media:

There are no solutions to the crisis that the banking sector is going through in the foreseeable future. Contrary to the theories that talk about merger as a way out of the banking collapse, Dr. Ghassan Al-Ayyash, the former deputy governor of the Banque du Liban, who considers in this interview with “Asas” that “mergers or acquisitions required the presence of a strong merging bank and a merged bank that is faltering. The current time is marked by heavy losses incurred by the overwhelming majority of banks, particularly the major ones. Therefore, merging to the rescue will not be the title of the next phase. This means that without restructuring the sector in the sense of recapitalizing it, the sector will not be saved, especially since every time financial institutions face imminent risks, the talk about merger returns under the title of banking reform.

To what extent is increasing the capital of Lebanese banks necessary?

– When the bank’s investments lead to realized losses that exceed the capital, this means that this institution has started financing the loss from the deposits that have been entrusted to it. This rule applies to one bank, to several banks, or to the entire banking system.

Therefore, the laws that sponsor and regulate banking activity oblige every bank that realizes losses from its capital to take the initiative to fill the loss within short periods, so that the loss does not expand and deposits are melt away.

The scene at the present time is represented by heavy losses incurred by the vast majority of banks, particularly the largest of them. Therefore, merging to salvation will not be the title of the next stage

It is agreed that the Lebanese banking system suffers from large losses resulting from several factors, the most prominent of which is the decline in the value of its loans to the state that is unable to pay its debts, and the decline in its employment in the Banque du Liban, which in turn incurred large losses as a result of financing the state’s deficit and the balance of payments deficit, in addition to bank losses In its loans to the private sector due to the significant economic downturn in the country.

What are the limits of the required increases in bank capital?

– The capital increases must be sufficient to cover the losses of the banking sector for the reasons we mentioned, i.e. what is required is to cover the sector losses. In the current Lebanese circumstance, estimating the aforementioned losses is not automatic, as is the case in a single bank that has losses due to poor loans to its customers. Rather, it is necessary to determine the losses in the state’s debt and in the investments in the Central Bank.

This issue has been pending for nearly a year due to the failure of consensus on estimating these losses between three parties: the state, the Bank of Lebanon, and the Association of Banks. This difference led to the entry of a fourth party on the line, which is the Finance and Budget Committee in the House of Representatives, which focused on the issue and had its own estimates of the losses of the financial sector.

A decision on this issue is necessary in order for the losses to be recovered, if possible, and for the banking sector to resume its normal activities. Unfortunately, under the gaze of the International Monetary Fund, the differences have frozen at a certain point, and the differences have not yet been resolved. The losses to it became like the incurable disease that devours the human body without treatment, pending the agreement of doctors to diagnose the disease and choose the appropriate medicine.

In the current Lebanese situation, estimating losses is not automatic, as it is the case in a single bank that has losses due to poor loans to its customers. Rather, it is necessary first to determine the losses in the state’s debt and in the investments in the Central Bank

The country is frozen until it is agreed to estimate the losses and distribute them to the parties. In this context, some refused to involve the state in bearing any losses, even though it is primarily responsible for spending, waste, chaos and corruption.

How does the amount of additional capital required for banks differ from one formula to another?

– The paper prepared by Hassan Diab’s government under the title A Financial Recovery Plan estimated the financial sector losses at more than $ 80 billion, and suggested uploading it to the Banque du Liban and the banks. And the amount that the paper proposed uploading to bank shareholders and depositors amounted to about $ 60 billion, bearing in mind that the total private funds in the sector amounted to about $ 20 billion. From here, and if this paper is imposed, it is possible to envisage the large size required to increase banks ’capital and / or deduct it from deposits.

How can this money be secured? What if a bank was unable to increase its capital to the required level?

B – In the first place, banks must increase their own funds by subscribing to old or new shareholders for this increase. The difficulty here relates to the weak ability of shareholders to subscribe in the current circumstances, due to bank losses and the decline in the exchange rate that concerns shareholders who transfer their money from abroad. Also, de facto Capital Control (without law) does not encourage shareholders to increase their contributions because they do not know when they can take their supposed profits abroad.

Moreover, the media atmosphere hostile to the banking industry in Lebanon does not encourage shareholders, as banks are accused of wrongful or unjustified accusations.

However, this fact is relative, as there are shareholders who estimate that their abstention from underwriting will lead to their loss of the capital currently remaining in the banks, meaning that the injection of additional funds helps to save their current employment in their banks.

Of course, the situation differs from one bank to another. There are banks that incurred large losses compared to banks with limited losses, and they require limited capital. It depends to a large extent on the size of each bank and on the size of its public sector debt investments.

The paper prepared by Hassan Diab’s government under the title A Financial Recovery Plan estimated the financial sector losses at more than $ 80 billion, and proposed to be uploaded to the Bank of Lebanon and the banks

What if one or more banks do not secure the required increase in their capital? Does he resort to merging with another bank?

– In the various previous banking crises in Lebanon, since the Intra Bank crisis, it was customary for a large bank, or let’s say a strong bank, to acquire the bank that suffers from a default. The acquisition takes place by buying the merging bank the assets and liabilities of the merged bank, or the stronger bank buys the defaulting bank with all its components, including the license and the branches.

The BDL’s policy was to facilitate these mergers in order to suffocate the crisis in any bank in its infancy, and to prevent a bank crisis from turning into a system crisis. In addition, encouraging mergers was a policy that the state as a whole committed to, in the legislative and executive branches, and legislations were issued to facilitate mergers and the acquisition of healthy banks on troubled banks.

Therefore, fertile imaginations and new ideas are needed to get out of the crisis. In light of the inability to invest in Lebanon, including increasing investment in banks, and with the difficulty of resorting to merger, it becomes clear that the crisis must be addressed as a whole by using various and multiple means within the comprehensive reform project.