Banking Reform Legislation Advances as Deposit Recovery Law Remains Contested

The Lebanese Parliament's Finance and Budget Committee has brought proposed amendments to the banking reform law to their concluding drafting phase, with full legislative approval anticipated mid-next week and referral to the General Assembly likely before month's end. Broad parliamentary consensus within the committee suggests passage should proceed smoothly once a session date is confirmed.

However, the law's implementation remains contingent on approval of the Financial Regulation and Deposit Recovery Law—the measure at the heart of ongoing disputes regarding the financial shortfall. The immediate achievements represent a calibrated response to International Monetary Fund requirements while attempting to preserve legislative sovereignty and respect existing legal frameworks protecting Central Bank independence and the authority of its Governor and governing council in monetary and financial sector management.

Finance Committee Chairman Ibrahim Kanaan disclosed that extended discussions centered on the Central Bank's request to incorporate language referencing Article 70 of the Money and Credit Law into Article 3 of the Banking Reform Law. Finance Minister Yassin Jaber indicated the government harbors no objection to this amendment. Consequently, Articles 3 and 13 will be revised to eliminate textual ambiguities surrounding Central Bank independence and the Central Council's role, though IMF approval remains necessary.

The tripartite legislative framework—encompassing the Banking Reform Law, the Financial Regulation and Deposit Recovery Law, and amendments to banking secrecy provisions—remains stalled by disagreement over the pending "Gap Law." Sharp disagreements persist regarding the scale of financial losses and how to allocate responsibility among stakeholders. Depositors, whose claims have languished for nearly seven years, face mounting uncertainty as these fundamental questions remain unresolved.

Government officials acknowledge that strict IMF compliance regarding restrictions on public funding for bank recapitalization could trigger the failure of most operational banks, leaving depositor protections undefined. Simultaneously, no assurance exists that meeting public debt sustainability conditions will restore Lebanon's access to international credit markets without a functioning banking system and a Central Bank with meaningful governance authority.

The government is currently revising its proposals before resubmitting them to Parliament. Officials express concern about oscillating between IMF demands to limit public fund deployment and the state's need to recover approximately $60 billion in overdraft financing from the Central Bank. These amounts, classified as part of roughly $80 billion in overall banking sector losses, represent depositors' funds and investment certificates held by commercial banks.

Central Bank Governor Karim Saeed characterizes Lebanon's financial and banking crisis as fundamentally "systemic," a designation recently acknowledged by the IMF itself. The collapse simultaneously encompasses the state's fiscal capacity, the central bank's financial position, banking sector liquidity, and public confidence—elements that reinforce each other in comprehensive deterioration.

Supporting this assessment, the Central Bank points to approximately $80 billion in banking sector losses, predominantly deposits held with the Bank of Lebanon. This cascading failure led to sovereign default on Eurobonds in spring 2020 and the subsequent collapse of treasury bond values denominated in local currency. The Lebanese pound has depreciated by more than 98 percent, spawning parallel currency markets operating outside legal channels.

The Association of Banks has conveyed its concerns to senior government officials despite being largely excluded from policy discussions. In recent communications with the President of the Republic, Board of Directors President Salim Sfeir stated that the current proposal appears inequitable to the banking sector and lacks practical implementability, while emphasizing the banking system's commitment to participating constructively in reform efforts and restoring economic confidence.

Parliamentary Finance Committee leadership has reaffirmed that the draft "gap" law under government reconsideration aims to recover deposits rather than eliminate them. Officials stress that securing confidence requires both external validation from the IMF and internal assurance for Lebanese depositors and investors, who will not commit capital to the country without genuine guarantees of protection.