Nearly six years after Lebanon was struck by a financial, monetary, and economic crisis, the Lebanese government has finally approved the draft law on the “Reform and Reorganization of Banks in Lebanon” on April 12, 2025, and referred it to Parliament for discussion and ratification.
Amid this process, Banque du Liban (BdL) submitted some observations on the draft law and later proposed a written alternative to replace Articles 5 and 6 of the version sent by the government. BdL also introduced a new Article 5 (bis) to clarify the distinction between the powers of the Higher Banking Authority and a new authority it proposed to establish, one that it linked to addressing what it referred to as a “systemic crisis.” It then submitted another version to replace Article 5, which was adopted by the subcommittee.
While the government’s draft law preserved the powers of the Higher Banking Authority—with proposed amendments to its membership to ensure institutional balance on one hand, and a balance between institutional representation and independent experts on the other—BdL circumvented the draft law approved collectively by the government. It instead proposed dividing the tasks of the Higher Banking Authority between two chambers. The second chamber would have full authority over banking sector restructuring and would effectively be dominated by the BdL Governor in decision-making. This chamber would consist of the Governor (as chair), two of his deputies, a judge, a representative of the National Deposit Guarantee Institution, and the Director General of Finance, with the Governor holding the tie-breaking vote.
It is clear that this proposal implements BdL’s approach, explicitly stated in its earlier draft presented to the subcommittee, which distinguished between the powers of the Higher Banking Authority and those of the proposed restructuring authority. According to this logic, the former would address individual bank issues, while the latter would handle reforms related to what BdL labels a “systemic crisis.” However, this proposal does not align with international standards and best practices and, to this day, BdL has not demonstrated how this distinction would improve the structure or effectiveness of the Higher Banking Authority.
It is essential to emphasize that the banking reform process must pursue two goals:
The first, direct goal is, of course, to restructure banks in order to resolve the deposit crisis.
The second, indirect goal is to identify the systemic failures by the institutions responsible for regulating and supervising the banking sector—namely Banque du Liban and the Banking Control Commission—on both the legislative and policy levels.
This second, indirect goal is just as important as the first. Without identifying and addressing systemic failures by revisiting and revising the legislative framework governing the banking sector—whether the Code of Money and Credit (Decree No. 13513/1963) and/or Law No. 28/1967 related to the amendment and completion of banking legislation and the creation of a joint deposit guarantee institution—there will be no sustainable solution. Even if the deposit and public debt crises are resolved and the banking sector recovers, Lebanon will likely face a similar crisis within a few years if systemic failures are not addressed.
Achieving both goals requires the establishment of an institutional framework for the Higher Banking Authority that adheres to international standards set by the Financial Stability Board for resolution authorities. The International Monetary Fund (IMF) is a member of this board and applies its Key Attributes in the Financial Sector Assessment Program (FSAP), which last assessed Lebanon in 2017.
Describing Lebanon’s crisis as a “systemic crisis” should not be used as an argument in favor of the central bank; rather, it is an argument against it. The central bank is the regulatory authority for the banking sector and holds certain supervisory powers over it, alongside the Banking Control Commission. It is—arguably—the primary party responsible for the “systemic crisis” due to its failure to exercise its powers properly, to foresee the crisis, and to take the necessary measures to prevent it and/or mitigate its consequences. After all, systemic crises are caused by systemic failures.
So then, what is the proper definition of a “systemic crisis”? And who has the authority to determine whether this designation applies, whether in the current crisis or in any future crises that may arise?
Answering these questions is crucial, as it highlights the need to establish clear criteria for this designation and to define which body holds the authority to apply it.
The recent change in leadership at the central bank is a positive development, but it does not mean that Banque du Liban (BdL) as an institution bears no responsibility for a significant part of the crisis. This reality necessitates the creation of a bank restructuring system that aligns with international standards set by the Financial Stability Board and the International Monetary Fund. In particular, the system must foster institutional balance that limits and/or prevents institutional conflicts of interest—conflicts that often serve to cover up previous systemic failures that led to the collapse of banks now facing restructuring. Such a system cannot be achieved through a body dominated by BdL or its Governor, especially not in the Lebanese context.
Why does Banque du Liban want a restructuring authority under its control, separate from the Higher Banking Authority?
BdL’s proposal raises multiple concerns, both in its form and content. It bypasses the collectively approved government decision and seeks to concentrate all restructuring powers in the hands of the central bank Governor—based on the notion that “I know better how to solve this.” This is happening in a context of near-total lack of transparency in BdL’s operations and heavy reliance on leaks, which erode long-term trust in the institution. Moreover, this approach violates the constitutional right to access information in Lebanon.
All of this is occurring amid leaks regarding the new Governor’s approach, which reportedly aims to ensure BdL’s solvency by relying on the remaining U.S. dollar reserves, gold (which is a tool for monetary stability, not a guarantee for deposits), and other assets owned or partially owned by BdL—such as Middle East Airlines, Intra Investment Company, and the $16 billion debt owed by the Lebanese state to BdL (the legitimacy of which remains a matter of legal dispute), among others.
According to these leaks, the total of reserves, gold, assets, and state debt is estimated at $62.5 billion, while the total frozen deposits amount to $82 billion. The leaks also suggest that—after classifying deposits—approximately $20 billion will fall outside the scope of any solution, leaving BdL in a position of notional solvency, which it might be able to convert into liquidity—without any guarantee that it can actually do so.
There are three main problems with this approach:
Lack of accountability: This approach does not address, in any way, the accountability of those responsible for the banking sector crisis—whether at the level of state institutions and administrations or the banks themselves. The banks, at the very least, bear a significant share of responsibility for failing to properly manage the risks associated with investing in treasury bills and Eurobonds, thereby jeopardizing the rights of their creditors, namely, the depositors.
In Terms of Structure:
Absence of a comprehensive economic vision: This approach exists outside of any integrated economic plan ratified by the government—one that would aim to reactivate Lebanon’s economic cycle and set it on a path toward growth. Returning deposits simply for the sake of returning them does not serve the broader public interest, which is the only legitimate justification for the use of public funds.
Perpetuation of the same system: If this approach is adopted as a solution, it will not be possible to identify the flaws that led to the crisis in the first place, within the legal framework that governs the banking sector, whether it be the Code of Money and Credit (Decree No. 13513/1963) or the Deposit Guarantee Law (Law No. 28/1967).
For example, the Banking Control Commission’s lack of enforcement and sanctioning powers undermined its supervisory role both before and after the crisis. As is now widely known, the Commission submitted its reports to the former Governor—as required by law—without the latter taking any meaningful action to ensure accountability, and in the absence of any mechanism that compelled him to do so.
Simply considering an approach like this leads us to conclude that, even if it manages to resolve the current crisis, we will face a similar crisis again in the near future. This is because the root causes of the current crisis remain unaddressed and unresolved. We would once again fall victim to the same systemic failures from Banque du Liban and the Banking Control Commission on one hand, and the same violations from the banking sector on the other—in a context where no one is held accountable or bears legal responsibility.
General Observations on Banque du Liban’s Proposal
Given everything above, we offer here some general remarks on what BdL has proposed, without delving into the detailed legal provisions submitted by both the government and BdL, in order to avoid technical discussions best left to another forum. The aim is to assess the validity and legitimacy of the central bank’s overall approach.
It must be noted that there is a formal violation—as previously mentioned—embedded in BdL’s proposal. The government as a whole approved the draft law that was referred to Parliament. It is not permissible for the Governor of the central bank to bypass that draft by proposing new legal texts directly to Parliament without consulting the government. Neither the Prime Minister, the President, nor any subset of ministers has the authority to delegate the Governor to submit provisions that contradict those collectively endorsed by the government.
If such changes are deemed necessary, the constitutional process must be followed: the matter must be brought back before the Council of Ministers, which alone has the authority to approve or reject modifications. Only the Cabinet has the legal right to withdraw the draft from Parliament and amend it, in accordance with the proper constitutional mechanisms.
In Substance
Labeling the crisis as a “systemic crisis”—or even implicitly adopting that term—should be considered an argument against the central bank, as previously stated, and not a justification for granting it broader powers. This so-called “systemic crisis” is, at its core, the responsibility of Banque du Liban (BdL), as the regulatory authority for the banking sector and a body vested with supervisory powers. In fact, precisely because it is a “systemic crisis,” this calls for limiting BdL’s ability to monopolize decision-making in matters of banking reform. The same applies to the Banking Control Commission, since any serious reform process is likely to expose the structural flaws within both institutions; flaws that played a key role in the collapse of the entire banking sector.
The claim that central bank independence requires BdL to monopolize all powers related to banking reform is, at best, inaccurate. Around the world, central bank independence is tied specifically to their role in formulating and implementing monetary policy. The purpose of this independence is to insulate monetary policy from political interference and complexity, as monetary decisions often require swift and technically informed action.
Moreover, central bank independence is not absolute, nor should it be. In any state governed by the rule of law, the powers granted to any public official—whether elected or appointed—must be subject to mechanisms that guarantee their legitimacy and allow for oversight to ensure alignment with constitutional and legal norms. These mechanisms also function as safeguards against the abuse of power. While the degree of oversight may vary by institution, central banks tend to enjoy the least direct oversight, precisely due to the importance of independence in maintaining a stable monetary policy. This is the model applied in Lebanon, where BdL decisions and directives remain subject to judicial review. There is also a limited mechanism for dismissing the Governor and his deputies under Article 19 of the Code of Money and Credit, as well as safeguards in the following article concerning full-time commitment and conflict of interest.
Still, all of this—as previously noted—is tied exclusively to BdL’s role in monetary policy. The concept of independence cannot be expanded to cover other areas of responsibility. Otherwise, it would open the door to the concentration of power in a single person, with virtually no means of reviewing their decisions. The preferred approach is always to distribute powers among different official bodies as part of broader mechanisms for accountability (checks and balances) and to ensure institutional balance.
On the Legitimacy of Representation
Another essential standard to consider in establishing a banking reform system is that decisions made in a crisis of this scale—like the one Lebanon is experiencing—must carry the highest degree of legitimate representation of the Lebanese people. This is due to the crisis’s profound impact on all aspects of life, and the far-reaching consequences that any proposed solutions will have on the country’s economic, financial, social, and possibly cultural and political future.
The notion that “only technical experts” should resolve the crisis is misguided. The authority that determines the structure, powers, and decision-making criteria of the restructuring body must be derived from popularly legitimate institutions—namely, Parliament (as the direct representative of the people) and the Council of Ministers (as the indirect representative, through parliamentary confidence). This is the literal implementation of Paragraph “D” in the preamble to the Lebanese Constitution, which states: “The people are the source of authority and sovereignty. They exercise it through constitutional institutions.”
This does not mean disregarding the views of public officials. On the contrary, their opinions must be considered. However, it is the responsibility of the government and Parliament to anticipate institutional conflicts among public bodies and to recognize the potential for some of these entities to try to conceal past failures. Therefore, the government and Parliament remain the only authorities entitled to make the final decisions regarding the draft law for banking reform. They are accountable to the Lebanese people, whereas public officials—regardless of their varying levels of independence—are accountable to them.
The Inappropriateness of Banque du Liban’s Proposed Model in the Lebanese Context
It is important to emphasize that the model proposed by Banque du Liban (BdL) is not suitable for the Lebanese context, for the following reasons:
Concentration of functions in a single entity: Centralizing multiple roles within the central bank is generally discouraged—particularly by the International Monetary Fund—based on numerous global experiences that show how institutional conflicts of interest can undermine or completely void the purpose of reform authorities.
Concealment of failures: The need to restructure one or more banks in Lebanon is likely to reveal previous systemic failures, whether in BdL or in the Banking Control Commission. This creates a built-in incentive for these institutions to avoid exposing such failures—at the very least—which would hinder the sustainable solutions needed to address the root causes of the crisis rather than just its symptoms.
Limited accountability: BdL’s powers in monetary policy are already subject to minimal oversight due to the need for central bank independence. However, if that same minimal oversight were extended to the bank restructuring process, it would further reduce the scope for accountability. This risk could be mitigated by limiting BdL’s control over decision-making in the Higher Banking Authority—for example, by ensuring it does not hold a majority of votes, and by balancing institutional representation with independent expert participation.
Lack of public trust: Public confidence in BdL is extremely weak—if not nonexistent—because of its past systemic failures, which played a central role in the crisis. This lack of trust undermines the legitimacy of any restructuring effort directly overseen by the central bank.
The structure currently proposed by BdL for forming the Higher Banking Authority—whether the existing model or its earlier suggestion to create a new restructuring body—does not conform to international standards established by the Financial Stability Board. These standards explicitly discourage the monopolization of decision-making power by any single entity in order to reduce institutional conflicts and prevent the concealment of systemic failures. BdL has not explained what benefit its proposal would offer compared to the government’s draft law. In fact, the BdL model has no logical, legal, or constitutional basis, particularly given the near-identical membership of the two proposed chambers and the illogical removal of voting rights from the Chair of the Banking Control Commission, while simultaneously increasing the decision-making power of the central bank Governor, especially in the second chamber.
This brings us back to a key conclusion: the most appropriate model for bank restructuring authorities is one in which the members are independent experts, especially in a context of institutional conflict of interest and where central banks and regulatory bodies may be motivated to hide past failures. That makes it far more difficult to achieve the indirect objective discussed earlier, namely, to identify systemic failures in order to launch a broader legislative reform of Lebanon’s financial and banking framework. If institutional representation is deemed necessary, it must be structured in a way that ensures institutional balance—that is, the majority of votes should belong to independent experts, not institutional representatives.
This means that BdL should be represented by only the Governor or one of his deputies, alongside a representative from the Banking Control Commission, and the remaining members should be independent experts, contrary to both the government’s draft and BdL’s own proposal. Additionally, the total number of members should be odd—such as five or seven—to avoid tie votes and prevent any one person from having a deciding vote. Finally, conflict of interest should be a disqualifying factor for appointment, not merely for participation in specific discussions or votes.
