Facts about the Lebanese Banking Sector

Key Prudential Practices

The Key Prudential Practices of the Lebanese banking sector are:

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.

Minimum capital adequacy ratio
Banks adopt Basel II and Basel III requirements to determine  credit risks, operational risks and market risks.
Currently, banks are preparing to meet Basel III requirements as follows:
  • Common Equity Tier 1 ratio: 9% at end 2017 to 10% at end 2018.
  • Tier one ratio: 12% at end 2017 to 13% at end 2018.
  • Total Capital ratio: 14.5% at end 2017 to 15% at end 2018.

These ratios include the "Capital Conservation Buffer" that must reach 4.5% by the end of 2018.

Banks also establish a documented mechanism to assess "Capital adequacy" according to the nature and size of the bank and the variety and sophistication of its banking operations, the type and size of risks to which the bank is exposed, and the bank's future plans. 

The assessment needs, in addition to measuring risks covered through Pillar I of Basel II (i.e. credit risk, market risk, and operational risk), measuring and monitoring other risks not covered such as interest rate risk in the banking book, credit concentration risk, liquidity risk and reputational risk.

Limits of facilities granted to a single entity
  • Limits of facilities calculated on consolidated basis and granted to a single debtor or a group of interlinked debtors to use in Lebanon or abroad: 20%  of the bank shareholder's equity.
  • Limits of facilities granted outside Lebanon and all foreign countries to a single debtor or a group of interlinked debtors to use in Lebanon or abroad: 20% of the bank shareholder's equity outside Lebanon and all foreign countries.  
  • 20% of the bank shareholders' equity (Tier one) if the facility is used in Lebanon or in countries with sovereign rating A+ and above.
  • 10% of the bank shareholders' equity if the facility is used outside Lebanon.
  • Total facilities must not exceed 50% of the bank shareholders' equity when used in countries with sovereign rating from BBB to A, and 25% in countries with sovereign rating less than BBB.
  • The total facilities that are used outside Lebanon (all foreign countries) cannot be larger than four times the bank shareholders' equity, and in countries with sovereign rating less than BBB only 100% of the bank shareholders’ equity.
  • The total facilities that each exceeds 10% of the bank shareholders' equity (large exposure) cannot be larger than 4 times the bank’s equity.
  • The total facilities granted from foreign units in a foreign currency should not exceed 60% of their foreign currencies deposits. 
Lending to related parties
  • Starting November 2012, the total of these credits must not exceed 2% of shareholders’ equity, and 1% for those granted without meeting the conditions stated in the above mentioned paragraph.

Liquidity ratios
  • Banks (except medium and long-term credit and investment 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.
  • The total net credits in LBP granted by banks to the private sector must not exceed 25% of its clients' total deposits in Lebanese pounds. 
  • Banks are required as well to maintain at the BDL at least 10% of their foreign currency liabilities as net liquid assets, and at least 15% of these foreign currency liabilities as remunerated foreign currency deposits. These latter are remunerated on the basis of maturity and prevailing market interest rates.
  • Banks operating in Lebanon must keep a liquidity Coverage Ratio which reflects their internal assessment of liquidity risk ans is consistent with their liquidity risk profile, provided this ratio exceeds 100% for each significant currency. The liquidity Coverage Ratio shall be calculated separately  for each significant currency, according to the following equation: the Stock of High Quality Liquid Assets divided by the Total Net Cash Outflows over the Next 30 Calendar days. 
  • Banks must also keep at least 40% of their shareholders' equity denominated in the Lebanese currency as liquid assets.

Foreign exchange exposure
  • The daily net trading position against the Lebanese Pound must not exceed 1% of shareholders' equity while the global position cannot exceed 40% of shareholders' equity. The global position takes the sum of either all debit or credit positions of all foreign currency accounts, whichever bigger.
  • A structural position of 60% of shareholders' equity is authorized to hedge the capital in LBP against fluctuations in the exchange rate.

Loan Classification and Provisioning
  • Rules are in conformity with those defined by the Basel Committee on Banking Supervision.
  • Banks are required to classify their loans, for supervisory purpose, into five categories.(standard, watch, substandard, doubtful, bad debt). In addition, banks are required to adopt a loan grading system of ten categories (7 for performing loans and 3 for non-performing loans NPLs).
  • 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.
  • Provisioning is regulated by the monetary authorities and the constitution and freeing of provisions is subject to BCC authorization. Provisions constituted under BCC authorization and supervision are tax deductible.
  • According to Basel II, banks must distribute all loans and credits in accordance with the following six main portfolios: the retail portfolio, small and medium entities portfolio, corporate portfolio, public sector entities portfolio, housing portfolio, and claims secured by commercial real estate. 

Legal Reserve and Provision for General Banking Risk
  • The provisions built up against doubtful debts and bad debts and approved by the Banking Control Commission are not subject to taxes.
  • Since 2016, banks have been building up provisions (general, collective and special) against expected credit losses on the on-balance sheet financial assets and the off-balance sheet financial liabilities involving credit risks, with all their performing and non-performing categories, in compliance with the International Financial Reporting Standard 9 (IFRS 9) that will be executed as of January 1st, 2018. These provisions are built up in the currency of the financial assets. 
  •  These provisions include: 
  • Collective provisions of 2% of credit risk-weighted assets for all credit portfolios, and that are not part of any shareholder's equity.
  • General provisions built up against possible future losses in assets that haven't witnessed a deterioration indicator, and that are included in tier2 capital subject to the limit of 1.25% of risk-weighted assets.
  • The negative variance between the available provisions balance and expected losses regularly calculated on all financial assets from the tier1 common equity  will be reduced.
  • Banks shall transfer to the "Undistributable General Reserve", the reserve previously built up fro their profits till 2017, such as the reserve for unspecified banking risks and the general reserve computed on the basis of the portfolios of all performing loans, including retail loans. 
  • These reserves are an integral part of shareholders' equity. 
  • Banks must transfer 10% of their annual profits to a legal reserve before the distribution of dividends.
International Standards for the Banking Industry 
  • Operative Banks in Lebanon comply with all the international standards for the banking industry
1- Basel committee 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 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 also establish a Risk Committee to supervise the implementation by the bank of the risk management rules detailed in the regulations issued and to be issued by BDL and BCC.
  • Banks must establish a documented mechanism to evaluate Internal Capital Adequacy (ICAAP) according to Basel Committee.
  • Banks must establish corporate governance criteria according to Basel Committee.

2- International standards for fighting money laundering and terrorist financing, and legal compliance
  • Banks must comply with GAFI's standards. 
  • Banks must develop policies and undertake preventive measures against the act of cyber crime, especially financial cyber crime. 
  • Banks must establish a Compliance department that shall comprise:

-A Legal Compliance Unit: in charge of identifying the compliance of the bank with laws and regulations in force. 

-An AML/CFT Compliance Unit: in charge of verifying  compliance with AML/CFT procedures and laws and regulations in force.

  • The Legal Compliance Unit also takes the appropriate measures in line with the provisions of the "General Data Protection Regulation" (GDPR) promulgated by the European Parliament and the Council of the European Union. 
3- Rule to fight tax evasion and the cooperation among states: 

Banks implement:

  • The requirements of the Foreign Account Tax Compliance Act (FATCA).
  • The standards of the Organisation for Economic Cooperation and Development (OECD) related to the Automatic Exchange of Information for Tax purposes.
  • In line with the international recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes and the Organisation for Economic Cooperation and Development (OECD) related to the Automatic Exchange of Information for Tax purposes, banks must take the proper administrative and technical measures to provide the Special Investigation Commission Tax Information required by foreign authorities concerning the accounts of some residents in their countries and relating to the tax information covered by bank secrecy. They also provide the Ministry of Finance information related to automatic exchange, and they establish, document and determine the financial accounts that should be reported. 
4- Financial Stability Standards 
  • Banks must develop a Recovery Plan consistent with Key Attributes of effective Resolution Regimes adopted by the Financial Stability Board. 
  • Banks must develop a Business Continuity Plan in order to ensure business continuity in case of disaster or any other event that may impede them from doing business normally. 
5- International Financial Reporting Standards
  • Banks must comply with the International Accounting Standard (IAS) and the financial disclosure should be in harmony with the best international practices.
  • Banks must comply with the International Financial Reporting Standards (IFRS). In addition, as of 2018, banks must implement the International Financial Reporting Standard 9 (IFRS 9) concerning the classification of financial assets, forming the numerous required provisions, and developing the necessary business models consistent with the requirements of this standard, to manage financial assets and insure the monetary flows.