The Senior Director for counter terrorism Sebastian Gorka’s visit to Lebanon over the past two days has added an unexpected but timely dimension to the country’s search for economic and political stability. His meetings with local officials and policy advisors reportedly centered on policies to cut off Iran-backed Hezbollah’s funding and illicit financing. A large Part of the funding was done via money exchange businesses that operate in cash, said a US Treasury statement. Yet, what his mission highlights most is the urgency of restoring financial normalcy. Four cash companies with ties to Hezbollah and their allies have replaced 60 banks in Lebanon post crisis.
Without a functioning banking sector, even the most ambitious diplomatic or development initiatives will falter. If Lebanon can accelerate resolution of its banking crisis — ideally through a more flexible, context-sensitive IMF approach — Gorka’s message of renewed Western support could translate into tangible progress. A lenient, reform-linked IMF program would not only stabilize Lebanon’s financial system but also give credibility to foreign partners seeking to invest in the country’s recovery.
Lebanon’s Central Bank and the IMF Diverge on How to Rescue a Broken Banking System
Lebanon’s long-awaited financial recovery has entered a decisive phase. For the first time in years, the country’s new government, the Banque du Liban (BdL), and the International Monetary Fund (IMF) appear to share a broad goal: stabilizing a banking system crippled by the 2019 collapse. But beneath the shared rhetoric of reform lies a fundamental disagreement — one that cuts to the core of how modern nations repair broken financial systems.
The divergence centers on the Banking Restructuring Framework proposed by the BdL and now under review by the IMF. While both sides agree on the need for transparency, depositor protection, and financial stability, their methods diverge profoundly in both principle and sequence.
Two Philosophies of Crisis Resolution
The BdL’s Approach: Sequenced, Legal, and Grounded in Precedent
After extensive consultations with international experts in systemic banking crises, the BdL has adopted a structured, legally robust plan consistent with the EU’s Bank Recovery and Resolution Directive (BRRD) and the U.S. FDIC model.
The plan begins by purging irregular claims from the central bank’s balance sheet — a move designed not to disguise insolvency but to distinguish between irregular and legitimateliabilities. Once this is achieved, a bank-by-bank Asset Quality Review (AQR) would determine which institutions are viable and which are not.
Only then would the hierarchy of claims apply: losses would be borne first by Tier-1 and Tier-2 shareholders, then by subordinated creditors, and only as a last resort by depositors — precisely as recommended in the Basel Committee on Banking Supervision’s Principles for Crisis Management (BIS, 2023).
Early BdL simulations, using data from the Banking Control Commission, suggest that while a few large institutions may prove insolvent, several smaller banks could remain viable under this framework. All would, however, be required to meet new, higher minimum capital thresholds to ensure future stability and depositor repayment capacity.
This sequencing mirrors the method used in Spain (Bankia, 2012), Ireland (post-2008 AQR), and the United States (TARP/FDIC programs) — each of which began with balance-sheet clarification and targeted recapitalization, not with a blanket destruction of equity.
The IMF’s Approach: Wipeout First, Diagnosis Later
The IMF’s preferred model, by contrast, reverses this logic. It would postpone the purge of irregular claims, treat them as temporary assets, and wipe out all banks’ equity up front, before any AQR is conducted.
Such an approach, effectively an ex-ante liquidation of the banking sector, would erase capital indiscriminately — punishing prudent and reckless institutions alike. There is no modern precedent for such a policy in the United States, Europe, or Asia. Even in Greece and Cyprus, where state-led recapitalizations were unavoidable, losses were imposed only after exhaustive asset reviews and stress tests.
In Lebanon’s context, the IMF model would clash with both international norms and the country’s new Banking Resolution Law — notably Article 36, which guarantees individualized assessment and equitable treatment of banks and depositors. Implemented as proposed, the plan could trigger mass litigation against the State and the central bank, sever correspondent-banking relationships, deter private recapitalization, and shatter the very confidence the IMF seeks to restore.
Technically, too, it is flawed: the IMF’s version starts by removing irregular claims on the asset side of the BdL’s balance sheet — impossible in practice, since the central bank holds consolidated accounts of banks, not individual depositor positions. The losses would then cascade down uniformly, without any differentiation or due process.
Why the BdL’s Framework Deserves Credibility
1. Alignment with Global Best Practice
The BdL’s model follows the very sequencing endorsed by the IMF in past crises — diagnosis, valuation, recapitalization — not indiscriminate equity elimination. Its structure is consistent with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes (FSB, 2023) and rooted in legal due process.
2. Preservation of the Rule of Law
By applying loss hierarchies only after verified AQRs, the BdL ensures that no depositor or shareholder is penalized without evidence. This adherence to due process is not cosmetic; it’s essential for Lebanon’s re-entry into the community of lawful financial systems.
3. Maximizing Depositor Recovery
The BdL’s approach mobilizes the widest possible base — the State, the central bank, and surviving commercial banks — to repay depositors. Under the IMF’s model, with the banking sector wiped out, there would be no surviving institutions left to contribute to repayment.
4. Rebuilding Confidence and Stability
By imposing a 10% Capital Adequacy Ratio (CAR) under Basel III rules, on all banks, the BdL sets the foundation for prudence and accountability. That means that if a The aim is not to save weak institutions but to create a smaller, sounder system capable of relaunching credit and supporting economic recovery.
The Price of Delay: A Cash-Based, Shadow Economy
While the IMF and BdL debate sequencing, Lebanon is slipping deeper into a cash-based economy. Physical-currency transactions now dominate commerce, creating fertile ground for money-laundering, tax evasion, and illicit finance. Without a functioning banking sector, the country risks breaching its FATF and Egmont Group commitments, alienating international partners, and losing the last remnants of fiscal transparency.
If this trajectory continues, Lebanon could face a permanent de-banking of its economy — a regression that no IMF program can reverse.