Lebanese Private Sector Network (LPSN) Position Paper on Restructuring the Banking Sector

The Lebanese Private Sector Network (LPSN) underscores the urgent need for a comprehensive and transparent restructuring of Lebanon’s banking sector. The prolonged financial crisis has severely eroded confidence in the banking system, restricted access to capital, and impeded economic recovery. A viable path forward requires equitable burden-sharing, fiscal discipline, and a commitment to sustainable growth. 

I. Accountability of Key Stakeholders 

The financial collapse stems from accumulated policy failures, mismanagement, and excessive risk-taking. Responsibility must be equitably distributed among the key actors: 

1. The State must acknowledge its role in excessive borrowing, fiscal mismanagement, chronic budget and balance of payments deficits, Eurobond default, and failure to implement necessary reforms. Restructuring must include comprehensive public sector reform to prevent future financial mismanagement. 

2. The Central Bank (BDL) played a pivotal role in executing unsustainable financial engineering policies and untargeted subsidies, depleting its reserves. It must undergo a thorough audit, adopt transparent monetary policies, and implement a credible recapitalization plan. 

3. The Banking Sector engaged in high-risk lending to the government and central bank in violation of prudential rules, particularly Circular 311/2012, prioritizing short-term profits over long-term stability. Additionally, banks facilitated discriminatory fund transfers, exacerbating the sector’s solvency and liquidity crisis.  

4. Speculators exploited financial instability for personal gain, contributing to capital flight and market destabilization. Their actions must be subject to legal review to prevent economic manipulation and illicit enrichment. 

II. Restoring Banking Sector Stability and Trust 

Restoring trust in the banking sector is paramount. To achieve financial stability, banks must: 

1. Undergo recapitalization to regain the confidence of depositors and correspondent banks. 

2. Fully comply with prudential regulations, including Basel II and III, Liquidity and Solvency Standards, and all BDL risk-related circulars, particularly Circular 311/2012. 

3. Be subject to restructuring in cases of insolvency, as mandated by existing legal frameworks, specifically laws 28/67, 2/67 and 110/90. 

III. Fiscal Responsibility and Effective Tax Collection 

A sustainable financial recovery hinges on robust tax collection and disciplined fiscal management. Key priorities include: 

1. Expanding the tax base by curbing evasion and enforcing compliance, particularly among high-net-worth individuals and large corporations that have historically evaded taxation. 

2. Enhancing revenue collection through more efficient mechanisms, avoiding excessive burdens on the productive private sector. 

3. Reforming public expenditures by prioritizing essential services and productive investments over inefficient subsidies and an inflated public sector wage bill. 

IV. Driving Economic Growth and Investment 

Economic recovery depends on fostering a business-friendly environment that stimulates investment and job creation. The restructuring plan must include: 

1. Private Sector Empowerment: Reducing bureaucratic obstacles, securing property rights, and establishing a clear legal framework for business operations. 

2. Capital Market Revitalization: Restoring access to credit and liquidity, particularly for small and medium-sized enterprises (SMEs). 

3. Investment Attraction: Ensuring a stable regulatory environment to rebuild investor confidence and encourage capital inflows. 

4. Strategic Infrastructure Development: Prioritizing investments in energy, transportation, and key productive sectors to stimulate economic activity. 

Conclusion 

Lebanon’s economic future depends on a fair and transparent restructuring of the banking sector, underpinned by sound fiscal management and a pro-growth strategy. The LPSN urges policymakers to enact reforms that restore financial stability and create an environment conducive to sustainable development. The private sector stands ready to contribute to Lebanon’s recovery and remains committed to advocating for policies that drive investment, job creation, and long-term prosperity.