Lebanon must confront its banking sector’s deep insolvency and foreign currency crisis with transparent reforms, legal accountability, and a credible restructuring plan to restore public trust and financial stability.

Lebanon’s banking sector is facing a devastating financial collapse. With a staggering $81 billion black hole, what remains of the country’s banking architecture is largely illusory—paralyzed by insolvency, entrenched in political denial, and profoundly distrusted by both depositors and the global community.

This article outlines a pragmatic roadmap for bank restructuring—one that integrates international best practices with Lebanon’s unique political and economic realities. At its core, the plan aims to restore justice for depositors, revive institutional viability, and begin the long process of economic recovery. But no reform can succeed without first rebuilding public trust, embracing legal accountability, and transparently recognizing losses. Without trust, there is no system.

The starting point for any meaningful restructuring is an honest reckoning with the scale of the damage. Based on realistic, market-informed valuations, the average Lebanese bank is deeply insolvent. This is not a system that can be fixed solely through recapitalization. The path forward requires a comprehensive allocation of losses and a fundamental reset of the sector’s foundations.

While much of the public discourse has framed Lebanon’s banking collapse as a crisis of capital, the underlying issue is more acute—and more perilous. It is, at its heart, a crisis of foreign currency liquidity. This is more than a semantic distinction: it reveals how institutional denial, political self-preservation, and regulatory inertia have compounded the crisis, misled the public, and delayed urgently needed solutions.

The structural mismatch at the heart of the collapse is evident: banks and the central bank (Banque du Liban, or BDL) accumulated massive short-term liabilities in foreign currency—primarily from depositors—and invested them in long-term, illiquid, or impaired assets, such as sovereign Eurobonds and opaque placements with the BDL. When foreign inflows dried up in late 2019, the system simply ran out of U.S. dollars.

This was a textbook liquidity crisis. The system owed more than it could pay—not because assets had suddenly evaporated, but because the cash wasn’t there. Yet, the institutional response framed the problem in terms of capital adequacy rather than liquidity resolution.

That framing has shaped reform efforts in profoundly damaging ways.

Several political and institutional factors contribute to this mischaracterization. Acknowledging a liquidity shortfall would have placed BDL under direct scrutiny, exposing its misuse of reserves and its role in quasi-fiscal financing.

Recasting the crisis as one of capital erosion allowed banks to avoid formal insolvency proceedings, buying time for superficial recapitalization efforts and creative accounting.

It also shielded politically connected actors from legal accountability for mismanagement, insider abuse, and dereliction of fiduciary duty.

Labeling the crisis a capital problem offered a narrative in which Lebanon’s banking elite were not culprits but potential saviors—willing to contribute or engineer financial fixes rather than face indictment.

This misframing has had serious and lasting consequences. Depositors were lulled into a false sense of security, reassured that their funds remained intact when, in fact, the dollars were gone. Withdrawal limits concealed the reality rather than addressing it.

Instead of mobilizing emergency liquidity measures or preparing structured loss allocation mechanisms, policymakers fixated on recapitalization scenarios detached from monetary reality.

International institutions, including the IMF, were provided with misleading data and policy frameworks, slowing Lebanon’s access to badly needed external support.

Meanwhile, both small savers and major depositors were denied a transparent, honest account of what happened to their money.

Before any restructuring blueprint can succeed, Lebanon must first correct its public and institutional narrative. The collapse stemmed from systemic foreign currency illiquidity rather than the sudden disappearance of capital. The crisis was deepened by regulatory failure and financial engineering, not mere market misfortune.

Owning this truth enables a more effective response: rebuilding FX reserves, reestablishing monetary credibility, and crafting recovery instruments that reflect actual institutional capacity—not delusions crafted in ledgers.

Confidence is not a luxury. It is the very oxygen of a functioning financial system. In Lebanon, that confidence has been suffocated—by opacity, by denial, and by elite impunity.

The state must formally acknowledge the insolvency of its banks and the impairment of deposits. Transparency is not a threat to recovery—it is its precondition.

Lebanon needs a modern, legally sound framework for bank resolution. Losses must be absorbed in a clear, just hierarchy: shareholders first, followed by subordinated debt holders, and then large depositors. An independent, politically insulated Resolution Authority must oversee the process. Small depositors must be protected in full.

Recovery depends on clean institutions. New banks—recapitalized, restructured, and governed with integrity—must emerge from the rubble. Most existing banks show negative net asset value. Large depositors will incur losses, but these losses must be fairly calculated, not imposed silently. A clear and just conversion mechanism must chart a realistic path to partial recovery.

Without rigorous valuation, any conversion amounts to legalized theft.

The financial system must be separated into functional and non-functional components. Toxic assets—BDL placements, Eurobonds, and impaired credits—should be transferred to a Recovery Vehicle. Meanwhile, viable loans, functioning branches, and operational systems should remain in “clean” banks.

An internationally credible auditor—ideally under the auspices of the IMF or the EU—should conduct post-cleanup valuations. Fraudulent transfers, insider loans, and supervisory negligence must be prosecuted and investigated thoroughly. Reform without accountability is a masquerade. Legitimacy depends on justice.

Lebanon’s banking crisis is not just an economic collapse. It is a crucible for political courage, institutional renewal, and moral accountability. The delay has already imposed punishing costs. What is needed now is not cosmetic reform, but a vision rooted in equity, implemented with integrity, and sustained by leaders unafraid to tell the truth.

Restructuring isn’t about making banks appear solvent. It’s about making them trustworthy again.

If Lebanon’s next government is serious about charting a path out of crisis—one grounded in fiscal reality, institutional reform, and social fairness—this roadmap offers the way forward.