The Key Prudential Practices of the Lebanese banking sector are:
1- Minimum capital for new banks
- LBP 10 billion for the head office of a commercial bank and LBP 500 million for each additional branch.
- LBP 30 billion for establishing an investment/specialized bank.
- LBP 150 billion for establishing an Islamic bank.
2- Minimum capital adequacy ratio
- At least 12% of shareholder’s equity to risk-weighted assets.
3- Loans to one borrower
- 20% of the bank shareholder’s equity if the facility is used in Lebanon or in countries with sovereign rating A+ and above.
- 10% of the bank shareholder’s equity if the facility is used in countries with sovereign rating A and below.
- The total facilities that each exceeds 15% of the bank’s equity cannot be larger than 8 times the bank’s equity.
4- Lending to related parties
- Must not exceed 5% of shareholders’ equity since end 2005.
5- Liquidity ratios
- Banks are required to maintain at least 10% of their Foreign Currency liabilities as net liquid assets, and at least 15% as remunerated deposits at BDL.
- Banks have to hold at the BDL as required reserves on Lebanese pound accounts, the sum of 25% of their demand liabilities in LBP and 15% of their term liabilities in LBP.
- Banks must maintain at least 40% of their shareholders' equity denominated in the Lebanese currency as liquid assets.
6- Foreign exchange trading
- The net trading position against the Lebanese Pound must not exceed 1% of shareholder’s equity while the global position cannot exceed 40% of shareholder’s equity.
- A structural position of 60% of shareholder's equity is authorized to hedge the capital in LBP against fluctuations in the exchange rate.
7- Loan Classification and Provisioning
- Rules are in conformity with those defined by the Basle Committee on Banking Supervision.
- Banks are required to classify their loans into five categories.(standard, watch, substandard, doubtful, bad debt).
- As by international accounting standards, all non-performing loans (NPLs), have their interest income reserved (unrealized), while provisioning is partial on doubtful debt and integral on bad debt (by decision of the Banking Control Commission - BCC and depending on each individual file).
- Provisioning is regulated by the regulatory authorities and the constitution and freeing of provisions is subject to BCC authorization. Provisions constituted under BCC authorization and supervision are tax deductible.
8- Legal Reserve and Provision for General Banking Risk
- Banks are required to withhold from their annual profits at least 0.2% and at most 0.3% of total risk weighted assets and contra accounts, i.e total denominator according to Basel II, as general banking reserves.
- These reserves are an integral part of shareholders' equity and are not tax deductible.
- Banks must transfer 10% of their annual profits to a legal reserve before the distribution of dividends.
9- Basel II standards for regulation and internal audit
- Banks are requested to establish internal audit and control units in accordance with the Principles for the Assessment of Internal Control System issued by the Basle Committee on Banking Supervision.
- Banks must establish an audit committee the role of which to assist the board of directors in fulfilling its supervisory role, review internal control regulations, and supervise internal audit activities (unit and auditors).
- Banks must establish a documented mechanism to evaluate capital solvency according to Basel II.
- Banks must apply corporate governance criterias according to Basel II.
10- Accounting Practices
- Banks conform to International Accounting Standards (IAS).
Last updated on January 23, 2010