Lebanese banks have resumed their open strike and concerns about the total collapse of the banking sector started to arise. LIMS explained that the banking system holds $84 billion in the central bank, which are depositors’ funds. As long as the central bank is unable to return the money in dollars to banks, the sector will have a solvency problem and will be unable to pay depositors. Banks also face liquidity problem since they hold $4.1 billion in correspondent banks, but they owe $4.3 billion.
LIMS added that banks are hoping for a capital control law to shield them against depositors’ lawsuits, but the Lebanese government is currently a caretaker government, and the parliament is unlikely to legislate laws given the presidential void. Restructuring the banking sector is also on the table, with talks about reducing the number of Lebanese banks from 50 to approximately 10 banks. This would mean that 80% of the banks would disappear.
LIMS highlighted that over the past three years, significant resources have been expended while debating how to distribute losses in the financial system between banks depositors and the government. Meanwhile, a depletion of the central bank foreign exchange reserves was taking place from $30 billion to $10 billion, and 60% of the GDP in USD has disappeared. Out of $93 billion of depositors’ funds, only $10 billion remain, and the focus of the discussions has been on how to distribute the $80 billion that was lost, rather than how to preserve and return the remaining funds to depositors. It is important to shift focus from distributing losses to distributing the remaining $10 billion cash and implementing measures to prevent further losses.
Unlike the slow banking resolution in Lebanon, the failure of three US banks was contained quickly to prevent contagion to other banks and transmission to the rest of the economy.
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