The Lebanese Banking Troika: A History of Instability and Unilateral Decision-Making
The current banking crisis in Lebanon broke out after three decades of monetary and banking stability. This stability was accompanied by a dominant, propagandistic discourse that convinced most Lebanese – especially the post-Civil War generation, which did not experience the previous monetary shocks – that it would last forever. In people’s minds, the concept of stability was associated, on one hand, with the “marvel” of the lira’s steady exchange rate against the dollar and, on the other hand, the resilience of the banking sector. Both were associated with the figure governing Lebanon’s central bank (the Banque du Liban), whose term extended across those three decades.
The current crisis dispelled these axioms for a large segment of Lebanese and managed to break the sector’s prestige in record speed. However, though the fragility of the banking structure has been unmasked, the history of instability that preceded the prolonged era of “stability” under the premiership of Rafic Hariri is still akin to a black box some of whose secrets are invoked in an incidental, fragmented, or distorted manner.
This history bears the keys to understanding the relationship among the parties of the oligarchical troika, namely the political authority in both its legislative and executive branches, the central bank, and the Association of Banks in Lebanon (ABL). It shows how the ABL was able, via the legal reforms enacted during the crises and, in particular, after the 1966 Intra Bank crisis, to entrench its role in monetary and financial decision-making institutionally. In other words, the ABL, contrary to the impression prevailing even within the uprising’s circles, is not merely a private lobby pressuring the state with no official capacity (though that role is important). Rather, it has a share in decision-making guaranteed by law.
Who is Responsible When Disaster Strikes?
Since its political independence, Lebanon has witnessed major banking shocks associated with political crises. Among them are the 1958 financial crisis, which was linked to the Civil War that broke out at the time, and what occurred during the 1967 Six-Day War, not to mention the crises that recurred throughout the Civil War and culminated in the crash of the lira in the mid-1980s.
These crises transcended wartime. The largest banking shocks prior to today occurred in the time of peace and prosperity (the 1966 Intra Bank crisis) and shortly after the Civil War (the sharp fall of the lira in 1992, which led to the toppling of Omar Karami’s government and the inauguration of the Rafic Hariri era). The last decade also witnessed the al-Madina Bank scandal, which was covered up. Official responses, the measures adopted, and their results vary between the past and the present.
Today, the ruling class are pointing fingers at each other for what the monetary and financial situation has come to. Opinions, including ones supportive of the uprising, differ over the obligations of central bank governor Riad Salame and the oversight apparatuses linked to him versus the role of the Council of Ministers or Parliament. Some see Salame merely as an official who needs legislations and government decisions to take action, while others assert that he has sufficient powers. The truth is that the Money and Credit Law grants the governor “the broadest of powers” to ensure monetary and financial stability, giving him far broader leeway than he claims today. Nevertheless, the governor cannot address a crisis of this magnitude without coordination and direction from the government and Parliament via decrees and legislations. In other words, the responsibility is shared. Moreover, irrespective of the legal texts, a historical review reveals that decision-making authority has always been split among the central bank, the political authority, and the ABL (albeit to varying degrees), and crises played a pivotal role in crystalizing this tripartite authority and progressively institutionalizing it such that it now lies at the core of the state structure.
The Crisis of the Three Banks: Confusion and Alternating Responsibility
In the 1960s, several banking crises occurred. The first happened in February 1964, i.e. the year of the central bank’s establishment, when two banks – the Real Estate Bank and the Commercial Bank – collapsed. The fledgling central bank was in the middle of a handover from the Bank de Syrie et du Liban (BSL). Notably, the Commercial Bank’s director George Dabbas requested assistance initially from the ABL, not the central bank. The ABL rushed to seek relief from the central bank, which in turn consulted the BSL, which tossed the ball back to the central bank. The confused trio did not manage to find a way out, so the final say went to the courts, which relied on the commerce laws instead of the new Money and Credit Law. The crisis caused restlessness in the financial markets. The newspapers published opinions, some mourning the “chaos” days before the central bank’s establishment that “didn’t hurt anyone” and others calling for more central bank intervention. ABL president Pierre Edde accused the banks’ critics of threatening “economic security”. Both he and central bank governor Philippe Takla argued that the crisis was isolated and did not reflect the status of the sector in general. Nevertheless, Takla pumped 24 million liras into the market in autumn 1964 to mitigate the lack of liquidity. However, the following year witnessed the collapse of another bank – Sogex – which prompted the central bank to acknowledge the need to curb the establishment of more banks. Hence, it asked the government to stop licensing commercial banks. On 5 January 1966, the government issued new decrees making it easier to liquidate and merge banks and making it more difficult to open new ones, but these did not fully address the situation of the banks that already existed. And so the major collapse occurred in autumn 1966.
The Intra Crisis: The Seed of Tripartite Coordination
When President Charles Helou learned that Intra was on the brink of insolvency on Friday, October 14, for three days he held marathon emergency ancillary and government meetings, some extending until the early hours of the morning. Many politicians, economists, and bankers participated in these meetings, including vice-governor of the central bank Joseph Oughourlian, who was the de-facto governor because of the monetary experience he had over Takla, who came from politics. The ABL also had a prominent presence via its president Pierre Edde, and it held an extraordinary general assembly that remained open across 15 and 16 October. These meetings resulted in exceptional measures to prevent the crisis from escalating, measures that ultimately led to the fall of Intra but saved the banking sector.
The government excepted Intra from these measures and later issued Law no. 2 of 1967, known as the “Intra Law”, which established the conditions that govern the process of administering any insolvent bank. These conditions include the appointment of an administrative committee to replace the private administration and decide, based on the company’s financial data, whether to bring the bank back afloat or to liquidate it. In the case of Intra specifically, the law guaranteed the rights of small depositors, and the government converted the major depositors into owners of the bank in a legal process that Najeeb Alameddine, one of the bank’s board members, deemed legal hocus-pocus. This brought the bank afloat, albeit for new owners. As for the rest of the sector, the government announced that the banks would close for a three-day period that would allow them, via central bank support, to secure the necessary liquidity to reassure depositors.
In fact, as a result of these efforts, which were accompanied by calls for public calm, the banks were able to provide withdrawals on the fourth day and Lebanon avoided a general withdrawals crisis like the one we are witnessing today. Charles Helou says in his memoirs that the central bank’s employees showed their readiness to work day and night to implement the Council of Ministers decision. However, he feared that any delay would lead to the failure of those measures and acceptance of Edde’s proposal to close the banks. In an account that American diplomats in Beirut related in a cable quoting the press, Edde “threatened” a strike if the government did not make the decision to close them.
Whatever Edde’s tone may have been, the Intra Bank crisis was the first real experience of tripartite coordination among the government, the central bank, and the ABL during an intractable crisis. This coordination was institutionalized via comprehensive banking legislations that the Council of Ministers adopted using extraordinary powers. These measures were supervised by the new central bank governor Elias Sarkis, who succeeded Takla after economic powers objected to his performance and he was questioned in court.
The Banks’ Grip Within the Oversight Bodies
On 5 June 1967, amidst this banking turmoil, the Zionist state launched its aggressive war. Depositors in Lebanon rushed to withdraw their money. Hence, on June 8, the government issued a legislative decree limiting cash withdrawals to 1,000 liras per depositor per bank while allowing transfers intended for commercial transactions, especially foreign ones. The government was able to issue these laws because Parliament had previously granted it extraordinary powers for general banking reform. On May 9, the Council of Ministers had adopted Law no. 28 of 1967, which suspended licenses to establish new banks for a renewable five-year term. The Council of Ministers also established facilitations to encourage merger and self-liquidation and drew up a mechanism for seizing defaulted banks. Ten banks were actually seized, and five others self-liquidated.
These measures breathed new life into the banking sector. However, the law’s significance for the mechanism of decision-making lies in its establishment of three institutions that have become an organic part of the states’ apparatuses for administering the sector and its crises, including monitoring its operations and holding violators accountable. The first institution is the Banking Control Commission of Lebanon (BCCL), charged with ascertaining that banks are functioning properly and authorized to request banking statistics and to periodically audit each bank and set a program for it to improve its status and control its expenditure. The second institution is the Higher Banking Commission, which is vested with imposing and applying punishments on banks based on the BCCL’s reports and the recommendations of the central bank’s governor. These punishments go as far as appointing a temporary controller or director and, in extreme cases, preventing the bank from operating. As for the third institution, it is the National Institute for the Guarantee of Deposits (NIGD), which promised to guarantee all deposits in Lebanese liras with no exceptions until the end of 1968 in order to restore trust and prevent their withdrawal. Thereafter, it adopted a ceiling initially set at 15,000 liras per depositor per bank.
The ABL managed to obtain a hefty quota of representation in each of these institutions despite the claim that they are independent. According to Law no. 28 of 1967, the BCCL consists of three members (increased to five in 1985) who are appointed via a Council of Ministers decree based on the finance minister’s proposal. However, one of them is proposed by the ABL, and another is suggested by the NIGD. The latter is a body shared between the public sector and banking sector, and although the government contributes half of its capital, the banks elect four of the seven board members, while the Council of Ministers appoints the other three. In other words, because most of the NIGD’s members are chosen by the ABL, the NIGD’s quota in the BCCL is indirectly a quota for the ABL. As the ABL also proposes one of the BCCL’s three members directly, two of the three members before 1985 were evidently encompassed by the ABL’s quota. Moreover, the 1985 amendment did not impose any qualification conditions for the two new members and therefore did not preclude a link between them and the ABL.
In summary, the ABL can acquire the majority of the positions in both the BCCL and the NIGD. As for the Higher Banking Commission, besides a judge approved by the Supreme Judicial Council and the director of public finance, the ABL occupies two positions (via the NIGD president and a member that it proposes directly), and the central bank occupies two positions (via the governor and one of his deputies). Hence, the majority in the three institutions goes firstly to the ABL, secondly to the central bank, and thirdly to the political authority.
This hierarchy turns the concept of oversight upside down such that the banks exercise a kind of self-oversight under the cover of the law and in collusion with the political authority. The constant in this relationship is the banks’ leverage. What has changed, however, is the role of the state and the political class. In the past, the political class did, for all its flaws, feel a degree of responsibility toward the public and adhered at a minimum to the symbolic need to go through the formal decision-making institutions and possessed a minimum level of competence that allowed it to save its system with the least losses. As time passed and the political authority in post-Civil War Lebanon transformed into an alliance between the sectarian militia leaders and Haririst capital, the political authority became more closely attached to the banking authority, on one hand, and less competent in state administration, on the other. Hence, it is no wonder that the central bank’s authority and the ABL’s leverage increased, with the central bank monopolizing monetary decision-making and the banks reluctant to punish or even reform themselves. Instead, they have come to replace the legislator, as we are witnessing today. In other words, the banks have become the judge and the judged.
Keywords: Lebanon, Banks, Crisis, Central bank