Lebanon’s proposed GAAP-based bank resolution law is being marketed as a serious attempt to solve the country’s deposit crisis. In reality, it continues the long-standing policy error that has defined the post-2019 response: confusing a liquidity collapse with an accounting imbalance.
Yes, Lebanon has an accounting problem. Balance sheets are shattered, equity is impaired, and losses must eventually be allocated. But accounting entries do not generate dollars. Liquidity does. And until liquidity is restored, any GAAP-driven “resolution” will remain a paper exercise detached from economic reality.
Ethics vs. Systemic Reality
The Financial Prosecutor General, Judge Maher Chaito, is ethically correct in pursuing bank owners and executives who wired money abroad during the 2019 bank closures—at a time when depositors were trapped, capital controls were imposed informally, and ordinary citizens could not access or transfer their own funds. This was a profound injustice and a moral failure that must be addressed.
However, while ethically justified, this approach worsens the systemic problem it claims to fix. Deposits are liabilities on a bank’s balance sheet. Forcing the return of these funds increases bank liabilities at a time when the state is simultaneously pushing a GAAP resolution law designed to reduce liabilities.
One arm of the state is inflating liabilities; the other is trying to shrink them. This is not policy coherence—it is contradiction.
Selective Justice and the PEP Blind Spot
More troubling still is that Judge Chaito’s circular focuses narrowly on funds wired abroad by bank owners, while conspicuously neglecting the far larger sums transferred abroad by politically exposed persons (PEPs).
This omission is not marginal—it is fundamental. The largest capital outflows during and after 2019 were not primarily bank-owner funds, but PEP-related deposits that exited the system with political cover, regulatory silence, and institutional complicity. By excluding PEP transfers, the circular creates a selective enforcement regime that targets one group while shielding the politically powerful.
If the objective is justice, then ignoring the largest category of suspect transfers undermines credibility. If the objective is financial repair, the approach is even more flawed: returning only bank-owner funds increases liabilities while leaving untouched the biggest source of drained liquidity.
This selective focus neither restores confidence nor meaningfully addresses the scale of the problem.
What GAAP Is Trying—and Failing—to Do
The proposed GAAP resolution law is fundamentally an exercise in loss allocation. It seeks to determine who absorbs the damage—banks, depositors, the central bank, or the state. That is an accounting discussion, not a recovery strategy.
Reducing liabilities on paper does not inject liquidity into the system. You can haircut deposits, eliminate equity, and reclassify losses indefinitely, but none of this creates fresh dollars or restores economic circulation.
At present, no actor in Lebanon has liquidity—not the government, not Banque du Liban, and not the banks. GAAP compliance does not change that reality.
Liquidity Comes from Assets, Not Prosecutions
If returned funds are to play a constructive role, they must increase assets, not merely reappear as liabilities. One viable path would be for banks to bring back funds and deploy them into productive lending—commercial, industrial, and private loans that generate cash flow and rebuild balance sheets.
But today, banks are structurally prevented from doing so.
Government policies that allow loans to be repaid at the artificial 1,500 LBP exchange rate make lending economically suicidal. No rational bank will extend credit when repayment can legally occur at a fraction of real value. As long as these distortions remain, banks will not lend, assets will not grow, and liquidity will not return.
Repealing these laws is not optional, it is the only way banks can increase assets and restore liquidity.
Deposits Without Interest Are a Fantasy
Another reality largely ignored in the GAAP debate: no investor will deposit money at zero interest. Expecting capital to remain in banks without yield is unrealistic. Money will stay under mattresses, in safes, or abroad.
Interest is not a luxury, it is an incentive. It encourages depositors to leave funds in the system long enough for banks to lend and generate returns. But interest rates require confidence: confidence that deposits will not be frozen again, that withdrawals will be honored, and that rules will not change arbitrarily.
The Circular 154 Lesson: Confidence Was Destroyed
In 2021, Banque du Liban’s Circular 154 asked banks to recapitalize. Some bank owners complied and began bringing funds back. That process stopped abruptly when the Lazard plan emerged, openly proposing a total wipeout of bank equity.
The message was unmistakable: bring your money back and lose it all. Predictably, capital stayed abroad.
Confidence collapsed—not because of lack of regulation, but because of policy hostility to capital itself.
Accounting Can Wait—Liquidity Cannot
The banking sector is the only sector capable of creating liquidity. Governments tax and spend. Central banks regulate and intermediate. Banks create liquidity through lending.
Who pays what between the government, Banque du Liban, banks, and depositors is an accounting question. It matters, but only after liquidity exists. Right now, the GAAP resolution law treats the crisis as if balance-sheet cleanup alone will revive the system.
It will not.
Until liquidity is restored—through lending, realistic exchange rates, legal certainty, investor incentives, and non-selective accountability that includes PEPs—any resolution law will merely reshuffle losses on paper.
From the government’s perspective, this may look like reform. From the economy’s perspective, it is paralysis.
This is not an accounting problem.
It is a liquidity problem.