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
In compliance with Basel II Accord.

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.

Limits of facilities granted to a single entity
  • 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.
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 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. These reserves pay zero interest but many deductions are allowed under a number of special lending schemes to some productive sectors and activities.
  • 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 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 Basle 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.

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.

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.

Other International Standards
  • Banks are in compliance with FATF recommendations to fight money laundering and the financing of terrorism.
  • Banks are currently preparing to meet the new standards required by US legislation FATCA and OECD concerning tax evasion.
  • Banks conform to International Accounting Standards (IAS/IFRS), and financial disclosure is in harmony with the best international practices.