Lebanon’s banking crisis, driven by political corruption and financial mismanagement, has devastated the nation’s economy and requires urgent systemic reforms to restore stability and public trust.

Once a symbol of stability and economic success, Lebanon’s banking sector has now crumbled, battered by an unforeseen storm. The sudden onset of the banking crisis in March 2020 unleashed a cascade of economic turmoil, leaving the nation reeling. The chaotic default on March 7th triggered a frantic scramble among depositors to withdraw or transfer funds, revealing the deep vulnerabilities within Lebanon’s financial system.

Banks, once the pillars of the economy, were paralyzed by the crisis, their operations halted, and their employees besieged by angry betrayed customers. Authorities’ initial inaction, compounded by a series of flawed policy decisions, deepened the crisis further. Under pressure from a corrupt political class, Lebanon’s central bank prioritized appeasing depositors over restoring the financial system’s integrity. This critical misstep eroded the central bank’s independence and entangled it in Lebanon’s enduring political quagmire.

Like its escalating public debt, Lebanon’s political class is on a dangerous trajectory. The caretaker cabinet’s feeble governance amidst prolonged political deadlock has only exacerbated the economic downturn, making any hope of rescue seem increasingly remote. Decades of corruption, reckless spending, and political gridlock have brought the nation to its knees, with banks unfairly thrust into the storm’s center.

As depositors face restricted withdrawals, halted transfers, and diminished banking services, the full extent of the crisis becomes evident. This is not merely a banking crisis but a systemic failure rooted in reckless deposit handling and the unanticipated risks following the government’s default. Addressing banks’ impaired assets and overdue liabilities has never been more urgent.

The emergence of Lebanon’s banking crisis was swift and devastating, demanding immediate and decisive policy actions that were, unfortunately, absent. Banks were forced to keep their doors open as the situation unfolded while effectively suspending operations. Bank employees, caught in the crossfire, managed the fury of customers who felt deceived and robbed of their wealth.

The central bank’s inadequate monetary policy responses deepened the crisis. Instead of stabilizing the financial system and restoring confidence, the central bank focused on short-term appeasement of depositors, a strategy aimed at alleviating a politically influential segment at the expense of broader financial integrity. This approach undermined the very foundations of Lebanon’s banking sector.

One of the most significant failures was the erosion of the independence of the central bank. Historically, central bank independence is crucial for maintaining monetary stability and fostering economic confidence. However, under immense pressure from Lebanon’s corrupt political class, the central bank’s leadership began aligning actions with political interests rather than sound financial principles. Desperate to maintain voter support, the political class exerted considerable influence over the central bank’s decisions, leading to superficial policy actions rather than addressing the systemic issues plaguing the banking sector. The central bank’s shift from safeguarding the financial system to becoming a tool for political maneuvering eroded its credibility and effectiveness.

This political contamination extended beyond the central bank. Lebanon’s bankers were trapped in the same web of political influence. Over the years, the lines between political power and financial management have blurred, leading to a banking sector deeply intertwined with the political elite. This relationship fostered an environment where political considerations swayed financial decisions, undermining objective risk assessment and sound management practices essential for banking stability.

The erosion of the central bank’s independence and the political contamination of bankers had far-reaching consequences. Observing the prioritization of political agendas over financial security, customers lost trust in the banking system. This lack of confidence triggered a rush to withdraw deposits and transfer funds out of Lebanon, exacerbating the liquidity crisis. Moreover, the absence of robust policy actions allowed the situation to escalate unchecked. Instead of implementing comprehensive reforms to address the crisis’s root causes, authorities opted for piecemeal solutions that provided no long-term relief. The compromised integrity of the central bank and the banking sector meant that any stabilization efforts were inherently flawed, lacking the necessary impartiality and focus on sustainable financial health.

Lebanon’s political and economic landscape is entrenched in unsustainability, driven by corruption, unproductive spending, and a paralyzing political impasse. The political class and public debt are on the brink of collapse, with the caretaker cabinet’s efforts proving futile. Excessive speeches and meetings have yielded no substantial decisions, plunging the nation deeper into economic decline. The measures the central bank took have been equally inadequate, draining banks of deposits and deepening public distrust in the financial system.

Decades of corrupt practices and irresponsible fiscal policies have culminated in the current crisis. Although fundamentally political, the ruling class has successfully redirected public scrutiny toward the banking sector, framing the issue as a crisis. This misdirection forced banks into the eye of the storm, making them the primary scapegoat for the nation’s economic woes. The public’s perception of the crisis is shaped by restrictive measures imposed by banks, such as stringent controls on cash withdrawals, outgoing transfers, and card usage.

These measures, compliant with the central bank circulars, have reduced banking services to mere administrative chores, masking the more profound systemic failures. At the heart of the banking sector’s turmoil is the fate of depositors’ money and the unanticipated risks that surfaced following the government’s disorderly default. Banks’ assets are severely impaired, and their liabilities are overwhelmingly overdue.

The banking sector in Lebanon is alarmingly under-capitalized and verging on insolvency. Without a credible plan to restructure government debt and address overdue loans, the sector’s stability is at risk. Despite establishing a “Bank Restructuring Committee” and issuing Central Bank Basic Circular 154, both initiatives lacked follow-through, severely undermining regulatory credibility. The central bank’s attempts to rescue every financial institution were driven by political motivations rather than sound monetary policy, further compounding the crisis.

Lebanon’s banking sector is entangled in complex political and economic challenges. The failure to address these systemic issues head-on has led to a situation where banks cannot meet their obligations and are struggling to regain public trust. The path to recovery requires a fundamental shift in political and economic strategies, focusing on transparency, accountability, and sustainable fiscal policies.

A comprehensive and pragmatic approach is necessary to restore integrity and confidence in Lebanon’s banking sector. This approach must navigate the industry’s complex political failures and economic challenges. Several vital principles and actionable steps are essential for this journey.

No institution should be deemed too big to fail. The financial sector must understand that every bank is accountable for its actions, regardless of size or political connections. Banks and bankers should not be protected at any cost. They are responsible for their conduct and should face consequences for their actions.

Financial resolutions must be free from political motivations. Politics’ influence has historically skewed priorities, leading to decisions favoring short-term political gains over long-term economic stability. Each financial institution must be evaluated and addressed based on its unique circumstances. Given banks’ diverse challenges and conditions, a one-size-fits-all approach is ineffective.

Banks must pivot from mere regulatory compliance to robust and proactive risk management. Effective governance and strategic oversight are paramount. Boards of directors should focus on removing incentives for excessive profit-taking and ensuring adequate risk mitigation. Banks should only promise what they can deliver credibly, sustainably, and profitably. This builds trust and aligns customer expectations with the bank’s capabilities.

The country’s central bank must transition from a permissive chaperone to an effective regulator. It should enforce regulations that promote stability and integrity rather than acting as a buffer for political mismanagement.

Banks should prioritize asset lifecycle over the credit approval process. This approach ensures comprehensive planning, from target market development to timely debt settlement, promoting repeat business and long-term stability. Restructuring and recapitalization are crucial but must be accompanied by substantive changes.

Banks must thoroughly assess the impact of sovereign default and the true extent of non-performing loans. This will help us understand the financial landscape and inform us of the necessary actions. Bonuses and dividends should be frozen until banks adequately recapitalize with a comfortable buffer. This conserves resources that can strengthen the bank’s financial foundation. Banks should consider consolidating, downsizing, or merging to create stronger, more resilient institutions. The priority should be the financial sector’s health, not individual entities.

The capacities of key management positions, including Corporate Banking, Chief Financial Officer, Chief Risk Officer, Treasury, Chief Internal Audit, and Head of Branch Network, should be reassessed. Similarly, the effectiveness of the Board of Directors should be evaluated to ensure they can deliver on their mandates. Financial institutions must cleanse themselves of political contamination and detach from dependency on politically exposed persons. This fosters an environment where decisions are based on sound economic principles rather than political expediency.

Rescuing Lebanon’s banking sector and economy is fraught with challenges, mainly due to entrenched political failures that have historically derailed reform efforts. However, it is possible to navigate this tumultuous landscape by adhering to principles of accountability, depoliticized decision-making, and tailored approaches coupled with immediate and strategic actions. Restoring confidence in Lebanon’s financial institutions requires an unwavering commitment to transparency, integrity, and effective risk management. Only through comprehensive reforms can the banking sector regain its stability and contribute to the nation’s economic recovery.