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RESTORING THE LEBANESE FINANCIAL SECTOR

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DOCUMENT CONTEXT AND OBJECTIVES

Context:

A combination of interrelated crises have rendered the financial sector in Lebanon illiquid and insolvent
The impact has been devastating for Lebanese citizens, many of whom have lost their jobs and access to their savings while also experiencing record setting levels of inflation
Left unaddressed, the financial sector losses are likely to increase - the losses have grown significantly over the past year
Closing the gaps are an integral part of the government’s economic reform and recovery plan and a pre-requisite for an IMF funded program

Objectives:

A transparent, equitable and implementable plan is needed to size and address the losses in the financial sector
This document follows an approach of sizing the losses in the balance sheets of BdL and commercial banks, establishing guidelines for distributing the losses and recommending specific initiatives along with their impact
The content in this document is meant to serve as a confidential working draft and would need to be followed with more detailed implementation procedures

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DISCLAIMER: SIZING THE LOSSES WERE BASED ON FINANCIAL SECTOR DATA USING ACCOUNTING METHODS ACCEPTABLE TO THE IMF AND GOVERNMENT’S ADVISORS

DATA SOURCES

ACCOUNTING PRINCIPLES

Sizing the losses were based on data provided by:

Central Bank �(Banque du Liban or BDL)

Banking Control Commission

of Lebanon

Association of Banks

in Lebanon

Ministry of Finance

of Lebanon

Accounting were used based on principles from:

IMF

Oliver Wyman

Lazard

KPMG

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APPROACH FOR RESTORING THE LEBANESE FINANCIAL SECTOR

Case brief – Uber

SIZING THE FINANCIAL SECTOR LOSSES

GAP REDUCTION: GOVERNMENT AND BANKS

GAP REDUCTION: DEPOSITORS

Identify main drivers that have led to significant losses in the financial sector
FX exposure, Eurobond haircut, NPLs & other impairments
Size the impact of loss drivers on the balance sheets of BdL and the commercial banks
Establish key principles for distributing the losses

Define a list of the potential gap-reducing initiatives and checking their alignment with the principles
Size the impact of the initiatives on closing the financial sector gap
Restate BdL and Bank balance sheets as a result of the adjustments made

Size the remaining gap to be borne by depositors
Propose a liquidity mechanism for releasing deposit to rightful owners
Recommend an approach for distributing remaining losses to depositor through bail-in and nominal deposit reduction

Marco-economic & other consideration

Identify key macro-economic consideration to be addressed:
Inflationary impact, return to private sector lending & increasing investments
Highlight other considerations

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APPROACH FOR RESTORING THE LEBANESE FINANCIAL SECTOR

Case brief – Uber

GAP REDUCTION: GOVERNMENT AND BANKS

GAP REDUCTION: DEPOSITORS

Define a list of the potential gap-reducing initiatives and checking their alignment with the principles
Size the impact of the initiatives on closing the financial sector gap
Restate BdL and Bank balance sheets as a result of the adjustments made

Size the remaining gap to be borne by depositors
Propose a liquidity mechanism for releasing deposit to rightful owners
Recommend an approach for distributing remaining losses to depositor through bail-in and nominal deposit reduction

Marco-economic & other consideration

Identify key macro-economic consideration to be addressed:
Inflationary impact, return to private sector lending & increasing investments
Highlight other considerations

SIZING THE FINANCIAL SECTOR LOSSES

Identify main drivers that have led to significant losses in the financial sector
FX exposure, Eurobond haircut, NPLs & other impairments
Size the impact of loss drivers on the balance sheets of BdL and the commercial banks
Establish key principles for distributing the losses

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THREE MAIN DRIVERS HAVE LED TO SIGNIFICANT LOSSES IN THE BALANCE SHEETS OF BDL AND THE COMMERCIAL BANKS

Drivers of the losses in the financial sector

Here we can show a slide without numbers, the three variables and have for each a BdL column and Commercial Banks column adding up to total losses

Description

3 drivers

COMMERCIAL BANKS

Net FX position exposure raised risk of depreciation

NET OPEN FX POSTION IN THE FINANCIAL SECTOR

1

EXPECTED SOVEREIGN DEBT HAIRCUT

Significant Haircut on Eurobonds

2

RESTATING ASSETS INCLUDING CAPITALIZED LOSSES AND NPLS

Assets used to capitalize losses resulting from financial engineering operations / minor NPLs from the banking sector

3

We will size the losses in the following slides

CENTRAL BANK

Non-performing Loans (NPLs) mainly driven by deteriorating economic condition

Restating assets related to NPLs and capitalized losses

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BDL’S RESTATED BALANCE SHEET��

Liabilities (inc. equity)
FX liabilities	93	93	93	93	93
o/w deposits	86	86	86	86	86
o/w capital account	3	3	3	3	3
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	66	5	5	5	5
o/w currency in circulation	28	2	2	2	2
o/w banks deposits	17	1	1	1	1
o/w valuation adjustment	11	1	1	1	1
o/w capital account	0	0	0	0	0
o/w other	10	1	1	1	1
Total Liabilities	159	98	98	98	98

Equity impact	0	-49	-54	-60	-60
Net FX Position	-69	-69	-74	-75	-75
Incremental equity impact		-49	-4	-6

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

CENTRAL BANK

1

2

3

Assets - USD BN
FX assets	40	40	36	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	5	5	1	1	1
o/w claims on banks	1	1	1	0	0
o/w other	4	4	4	4	4
LBP assets	119	9	9	4	4
o/w seigniorage assets	65	5	5	0	0
o/w other (T-bills, etc..)	54	4	4	4	4
Total Assets	159	49	45	38	38

BDL balance sheet�USD BN, as of Sept 2021

Notes: Current status (@1,500) is using BdL BS from September 2021 with two adjustments, separating claim on banks from “cash” and overdraft in lira instead of USD; sovereign haircut is current proposed by Lazard; other impairments are based on guidance from Oliver Wyman report and IMF (specifically with reference to seigniorage assets)

Excluding the value of gold

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BDL’S RESTATED BALANCE SHEET�CURRENCY DEVALUATION��

Liabilities (inc. equity)
FX liabilities	93	93	93	93	93
o/w deposits	86	86	86	86	86
o/w capital account	3	3	3	3	3
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	66	5	5	5	5
o/w currency in circulation	28	2	2	2	2
o/w banks deposits	17	1	1	1	1
o/w valuation adjustment	11	1	1	1	1
o/w capital account	0	0	0	0	0
o/w other	10	1	1	1	1
Total Liabilities	159	98	98	98	98

Equity impact	0	-49	-54	-60	-60
Net FX Position	-69	-69	-74	-75	-75
Incremental equity impact		-49	-4	-6

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

CENTRAL BANK

1

2

3

Assets - USD BN
FX assets	40	40	36	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	5	5	1	1	1
o/w claims on banks	1	1	1	0	0
o/w other	4	4	4	4	4
LBP assets	119	9	9	4	4
o/w seigniorage assets	65	5	5	0	0
o/w other (T-bills, etc..)	54	4	4	4	4
Total Assets	159	49	45	38	38

BDL balance sheet�USD BN, as of Sept 2021

Notes: Current status (@1,500) is using BdL BS from September 2021 with two adjustments, separating claim on banks from “cash” and overdraft in lira instead of USD; sovereign haircut is current proposed by Lazard; other impairments are based on guidance from Oliver Wyman report and IMF (specifically with reference to seigniorage assets)

Excluding the value of gold

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BDL’S RESTATED BALANCE SHEET�SOVEREIGN DEBT DEFAULT��

Liabilities (inc. equity)
FX liabilities	93	93	93	93	93
o/w deposits	86	86	86	86	86
o/w capital account	3	3	3	3	3
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	66	5	5	5	5
o/w currency in circulation	28	2	2	2	2
o/w banks deposits	17	1	1	1	1
o/w valuation adjustment	11	1	1	1	1
o/w capital account	0	0	0	0	0
o/w other	10	1	1	1	1
Total Liabilities	159	98	98	98	98

Equity impact	0	-49	-54	-60	-60
Net FX Position	-69	-69	-74	-75	-75
Incremental equity impact		-49	-4	-6

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

CENTRAL BANK

1

2

3

Assets - USD BN
FX assets	40	40	36	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	5	5	1	1	1
o/w claims on banks	1	1	1	0	0
o/w other	4	4	4	4	4
LBP assets	119	9	9	4	4
o/w seigniorage assets	65	5	5	0	0
o/w other (T-bills, etc..)	54	4	4	4	4
Total Assets	159	49	45	38	38

BDL balance sheet�USD BN, as of Sept 2021

Notes: Current status (@1,500) is using BdL BS from September 2021 with two adjustments, separating claim on banks from “cash” and overdraft in lira instead of USD; sovereign haircut is current proposed by Lazard; other impairments are based on guidance from Oliver Wyman report and IMF (specifically with reference to seigniorage assets)

Excluding the value of gold

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BDL’S RESTATED BALANCE SHEET�OTHER ASSET IMPAIRMENT �

Liabilities (inc. equity)
FX liabilities	93	93	93	93	93
o/w deposits	86	86	86	86	86
o/w capital account	3	3	3	3	3
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	66	5	5	5	5
o/w currency in circulation	28	2	2	2	2
o/w banks deposits	17	1	1	1	1
o/w valuation adjustment	11	1	1	1	1
o/w capital account	0	0	0	0	0
o/w other	10	1	1	1	1
Total Liabilities	159	98	98	98	98

Equity impact	0	-49	-54	-60	-60
Net FX Position	-69	-69	-74	-75	-75
Incremental equity impact		-49	-4	-6

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

CENTRAL BANK

1

2

3

Assets - USD BN
FX assets	40	40	36	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	5	5	1	1	1
o/w claims on banks	1	1	1	0	0
o/w other	4	4	4	4	4
LBP assets	119	9	9	4	4
o/w seigniorage assets	65	5	5	0	0
o/w other (T-bills, etc..)	54	4	4	4	4
Total Assets	159	49	45	38	38

BDL balance sheet�USD BN, as of Sept 2021

Notes: Current status (@1,500) is using BdL BS from September 2021 with two adjustments, separating claim on banks from “cash” and overdraft in lira instead of USD; sovereign haircut is current proposed by Lazard; other impairments are based on guidance from Oliver Wyman report and IMF (specifically with reference to seigniorage assets)

Excluding the value of gold

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BDL’S RESTATED BALANCE SHEET - RESULT

Liabilities (inc. equity)
FX liabilities	93	93	93	93	93
o/w deposits	86	86	86	86	86
o/w capital account	3	3	3	3	3
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	66	5	5	5	5
o/w currency in circulation	28	2	2	2	2
o/w banks deposits	17	1	1	1	1
o/w valuation adjustment	11	1	1	1	1
o/w capital account	0	0	0	0	0
o/w other	10	1	1	1	1
Total Liabilities	159	98	98	98	98

Equity impact	0	-49	-54	-60	-60
Net FX Position	-69	-69	-74	-75	-75
Incremental equity impact		-49	-4	-6

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

CENTRAL BANK

1

2

3

Assets - USD BN
FX assets	40	40	36	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	5	5	1	1	1
o/w claims on banks	1	1	1	0	0
o/w other	4	4	4	4	4
LBP assets	119	9	9	4	4
o/w seigniorage assets	65	5	5	0	0
o/w other (T-bills, etc..)	54	4	4	4	4
Total Assets	159	49	45	38	38

BDL balance sheet�USD BN, as of Sept 2021

Notes: Current status (@1,500) is using BdL BS from September 2021 with two adjustments, separating claim on banks from “cash” and overdraft in lira instead of USD; sovereign haircut is current proposed by Lazard; other impairments are based on guidance from Oliver Wyman report and IMF (specifically with reference to seigniorage assets)

Excluding the value of gold

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THE USD 60BN IN LOSSES IN BDL’S BALANCE SHEET IS NOT SENSITIVE TO LIRA DEVALUATION AND SOVEREIGN DEBT HAIRCUT�

Future Lebanese Lira devaluation

30,000

Haircut on sovereign debt

-58.5	-58.8	-59.0	-59.3	-59.5	-59.8
-58.7	-58.9	-59.2	-59.4	-59.7	-59.9
-58.8	-59.1	-59.3	-59.6	-59.8	-60.1
-59.1	-59.4	-59.6	-59.9	-60.1	-60.4
-59.7	-60.0	-60.2	-60.5	-60.7	-61.0
-61.5	-61.7	-62.0	-62.2	-62.5	-62.7

Total Losses

Table components:

25,000

20,000

15,000

65%

70%

75%

80%

85%

90%

Sensitivity analysis of BDL losses–Devaluation to haircut of sovereign debt

USD BN

CENTRAL BANK

Base Case

10,000

5,000

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BANKS’ RESTATED BALANCE SHEET

COMMERCIAL BANKS

Liabilities (inc. equity)
FX liabilities	124	124	124	124	124
o/w private sector deposits (lollars)	104	104	104	104	104
o/w fresh USD money	1	1	1	1	1
o/w capital account	9	9	9	9	9
o/w debt	3	3	3	3	3
o/w due to BDL	2	2	2	2	2
o/w Other FX liabilities	6	6	6	6	6
LBP liabilities	54	4	4	4	4
o/w private sector deposits	30	2	2	2	2
o/w capital account	10	1	1	1	1
o/w debt	3	0	0	0	0
o/w due to BDL	10	1	1	1	1
o/w Other liabilities	2	0	0	0	0
Total Liabilities	178	128	128	128	128

Equity impact	6.6	1	-7	-9	-9
Net FX Position	0.6	0.6	-7	-9	-9
Incremental equity impact		-.5.6	-7.8	-2.5

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

1

2

3

Assets - USD BN
FX assets	125	125	117	114	114
o/w Deposits @BdL	86	86	86	86	86
o/w Claims on private sector	14	14	14	11	11
o/w Eurobonds	9	9	1	1	1
o/w Others FX assets	16	16	16	16	16
LBP assets	60	5	5	5	5
o/w Deposits @BdL	26	2	2	2	2
o/w other (T-bills, claim on private sector, etc..)	34	3	3	3	3
Total Assets	185	129	121	119	119

Commercial banks balance sheet�USD BN, as of Sept 2021

COMMERCIAL BANKS

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BANKS’ RESTATED BALANCE SHEET�CURRENCY DEVALUATION

COMMERCIAL BANKS

Liabilities (inc. equity)
FX liabilities	124	124	124	124	124
o/w private sector deposits (lollars)	104	104	104	104	104
o/w fresh USD money	1	1	1	1	1
o/w capital account	9	9	9	9	9
o/w debt	3	3	3	3	3
o/w due to BDL	2	2	2	2	2
o/w Other FX liabilities	6	6	6	6	6
LBP liabilities	54	4	4	4	4
o/w private sector deposits	30	2	2	2	2
o/w capital account	10	1	1	1	1
o/w debt	3	0	0	0	0
o/w due to BDL	10	1	1	1	1
o/w Other liabilities	2	0	0	0	0
Total Liabilities	178	128	128	128	128

Equity impact	6.6	1	-7	-9	-9
Net FX Position	0.6	0.6	-7	-9	-9
Incremental equity impact		-5.6	-7.8	-2.5

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

1

2

3

Assets - USD BN
FX assets	125	125	117	114	114
o/w Deposits @BdL	86	86	86	86	86
o/w Claims on private sector	14	14	14	11	11
o/w Eurobonds	9	9	1	1	1
o/w Others FX assets	16	16	16	16	16
LBP assets	60	5	5	5	5
o/w Deposits @BdL	26	2	2	2	2
o/w other (T-bills, claim on private sector, etc..)	34	3	3	3	3
Total Assets	185	129	121	119	119

Commercial banks balance sheet�USD BN, as of Sept 2021

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BANKS’ RESTATED BALANCE SHEET�SOVEREIGN DEBT HAIRCUT�

COMMERCIAL BANKS

Liabilities (inc. equity)
FX liabilities	124	124	124	124	124
o/w private sector deposits (lollars)	104	104	104	104	104
o/w fresh USD money	1	1	1	1	1
o/w capital account	9	9	9	9	9
o/w debt	3	3	3	3	3
o/w due to BDL	2	2	2	2	2
o/w Other FX liabilities	6	6	6	6	6
LBP liabilities	54	4	4	4	4
o/w private sector deposits	30	2	2	2	2
o/w capital account	10	1	1	1	1
o/w debt	3	0	0	0	0
o/w due to BDL	10	1	1	1	1
o/w Other liabilities	2	0	0	0	0
Total Liabilities	178	128	128	128	128

Equity impact	6.6	1	-7	-9	-9
Net FX Position	0.6	0.6	-7	-9	-9
Incremental equity impact		-5.6	-7.8	-2.5

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

1

2

3

Assets - USD BN
FX assets	125	125	117	114	114
o/w Deposits @BdL	86	86	86	86	86
o/w Claims on private sector	14	14	14	11	11
o/w Eurobonds	9	9	1	1	1
o/w Others FX assets	16	16	16	16	16
LBP assets	60	5	5	5	5
o/w Deposits @BdL	26	2	2	2	2
o/w other (T-bills, claim on private sector, etc..)	34	3	3	3	3
Total Assets	185	129	121	119	119

Commercial banks balance sheet�USD BN, as of Sept 2021

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BANKS’ RESTATED BALANCE SHEET�OTHER ASSET IMPAIRMENT �

COMMERCIAL BANKS

Liabilities (inc. equity)
FX liabilities	124	124	124	124	124
o/w private sector deposits (lollars)	104	104	104	104	104
o/w fresh USD money	1	1	1	1	1
o/w capital account	9	9	9	9	9
o/w debt	3	3	3	3	3
o/w due to BDL	2	2	2	2	2
o/w Other FX liabilities	6	6	6	6	6
LBP liabilities	54	4	4	4	4
o/w private sector deposits	30	2	2	2	2
o/w capital account	10	1	1	1	1
o/w debt	3	0	0	0	0
o/w due to BDL	10	1	1	1	1
o/w Other liabilities	2	0	0	0	0
Total Liabilities	178	128	128	128	128

Equity impact	6.6	1	-7	-9	-9
Net FX Position	0.6	0.6	-7	-9	-9
Incremental equity impact		-5.6	-7.8	-2.5

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

1

2

3

Assets - USD BN
FX assets	125	125	117	114	114
o/w Deposits @BdL	86	86	86	86	86
o/w Claims on private sector	14	14	14	11	11
o/w Eurobonds	9	9	1	1	1
o/w Others FX assets	16	16	16	16	16
LBP assets	60	5	5	5	5
o/w Deposits @BdL	26	2	2	2	2
o/w other (T-bills, claim on private sector, etc..)	34	3	3	3	3
Total Assets	185	129	121	119	119

Commercial banks balance sheet�USD BN, as of Sept 2021

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BANKS’ RESTATED BALANCE SHEET - RESULT � �

COMMERCIAL BANKS

Liabilities (inc. equity)
FX liabilities	124	124	124	124	124
o/w private sector deposits (lollars)	104	104	104	104	104
o/w fresh USD money	1	1	1	1	1
o/w capital account	9	9	9	9	9
o/w debt	3	3	3	3	3
o/w due to BDL	2	2	2	2	2
o/w Other FX liabilities	6	6	6	6	6
LBP liabilities	54	4	4	4	4
o/w private sector deposits	30	2	2	2	2
o/w capital account	10	1	1	1	1
o/w debt	3	0	0	0	0
o/w due to BDL	10	1	1	1	1
o/w Other liabilities	2	0	0	0	0
Total Liabilities	178	128	128	128	128

Equity impact	6.6	1	-7	-9	-9
Net FX Position	0.6	0.6	-7	-9	-9
Incremental equity impact		-5.6	-7.8	-2.5

Current status @1,500	Currency devaluation @20,000	Sovereign debt haircut @85%	Other asset impairment	Result

1

2

3

Assets - USD BN
FX assets	125	125	117	114	114
o/w Deposits @BdL	86	86	86	86	86
o/w Claims on private sector	14	14	14	11	11
o/w Eurobonds	9	9	1	1	1
o/w Others FX assets	16	16	16	16	16
LBP assets	60	5	5	5	5
o/w Deposits @BdL	26	2	2	2	2
o/w other (T-bills, claim on private sector, etc..)	34	3	3	3	3
Total Assets	185	129	121	119	119

Commercial banks balance sheet�USD BN, as of Sept 2021

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THREE MAIN DRIVERS HAVE LED TO USD 69.1BN LOSSES IN �THE BALANCE SHEETS OF BDL AND THE COMMERCIAL BANKS

Drivers of the losses in the financial sector
USD BN

Here we can show a slide without numbers, the three variables and have for each a BdL column and Commercial Banks column adding up to total losses

Description

3 drivers

Net FX position raised exposure risk to depreciation

NET OPEN FX POSITION

1

EXPECTED SOVEREIGN DEBT HAIRCUT

Significant Haircut on Eurobonds

2

RESTATING ASSETS INCLUDING CAPITALIZED LOSSES AND NPLS

o/w impairment of assets used to capitalize losses resulting from financial engineering operations

o/w minor NPLs from the banking sector

3

Total Losses

-9.2BN

Non-performing Loans (NPLs) mainly driven by post adjustment expected impact when USD debtors need to pay in USD or new effective rate

-59.8BN

Other elements that led to losses in the financial sector

-49.3

COMMERCIAL BANKS

CENTRAL BANK

+1

-4.3

-7.8

-1

-2.5¹

-69.1BN

Note: 1- NPL provisions are already at USD 7BN and within a tight range of third-party estimates however, AQR is needed for the banking sector to confirm the numbers

-5

-6.2

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PRINCIPLES USED FOR LOSS DISTRIBUTION INTIATIVES

DISTRIBUTE LOSSES EQUITABLY

ACCELERATE THE ECONOMIC RECOVERY

SECURE BUY-IN FROM CREDITORS

Those who were responsible and who reaped greater rewards from the previous financial regime should contribute the most while noting that financial contributions from the government are at the expense of the population as a whole

Ensure that initiatives do not hamper the banking sector, BdL and government from fulfilling their duties

Government, BDL and commercial banks to contribute as priority to the gap vis-à-vis depositors
Direct financial contribution by the government should be avoided and instead the government should guarantee the recovery and enforce equity

2

3

4

Accelerate financial sector’s (banks and BdL) return to solvency and liquidity by front-loading impact of initiatives while also managing LBP money supply and USD liabilities, avoiding inflation and reducing value discrepancy between USD cash and USD deposits
Government to focus on economic recovery rather than transferring or liquidating its assets

#

Principle name

Description

Implication (non exhaustive)

Make sure that initiatives will be acceptable to current and future creditors, who will be vital to the broader economic recovery plan

Initiatives to avoid creative accounting and overly complex initiatives that will not satisfy international standards

PROTECT THE MOST VULNERABLE

Safeguard the most vulnerable segments of society by guaranteeing the value of their deposit

Establish a threshold of deposits that will be largely unaffected
Maximize the depositor base that would be eligible to Circular 158 or equivalent after losses are distributed

1

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IN TERMS OF DISTRIBUTING THE LOSSES, THERE ARE 4 PARTIES INVOLVED: GOVERNMENT, CENTRAL BANK, COMMERCIAL BANKS AND DEPOSITORS�

Involved entities and parties

GOVERNMENT

Recouping stolen funds, recapitalizing BdL using state assets, new debt, etc..

CENTRAL BANK

COMMERCIAL BANKS

DEPOSITORS

Potential

contribution areas

Operating at a negative level of equity, reducing non bank-related liabilities and capital account

Writing-off shareholder capital, bailing-in creditors, injecting fresh capital, etc.

Reduce nominal value of deposits, extend maturity of deposits, bail-in depositors

Highest priority for contribution to losses

Lowest priority for contribution to losses

Priority of contribution to losses

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WE HAVE ASSESSED A LONG LIST OF LOSS DISTRIBUTION MECHANISMS AGAINST THE STATED PRINCIPLES

Potential mechanism across the different parties

GOVERNMENT

Student rewards

5

Recoup stolen and smuggled funds

1

Recapitalize Financial Sector

2

Write-off BDL liabilities

4

Mechanism

Shareholder capital & Subordinate Debt

6

Inject fresh capital

7

Alignment with principles

CENTRAL

BANK

COMMERCIAL

BANKS

Set up a mechanism to recover embezzled and misappropriated public funds and recoup smuggled funds post Oct 2019

Comment

3

Operate at slight negative equity

5

Create PPP investment opportunities for depositors

Leverage the state assets to define PPP projects that the depositors will benefit from as shareholders

Depositors

8

To be addressed after tackling the mechanism of the government, BDL and commercial banks

Brief description

Repay BDL overdraft in USD, sell or transfer state assets or issue securities to BDL, recapitalize the banks

Reduce liabilities and capital of BDL

Operate the central bank at a maximum potential negative equity

Contribute to losses through shareholder capital as well as bailing-in banking sector creditors

Recapitalize the banks through shareholder contribution of fresh capital

Disagreement with creditors (P#3)

Risks hindering the recovery activities of the government by reducing potential revenue in the budget (P#2)

Should be used as last resort

Aligned with principles

Possibility of misalignment with principles

Not aligned with principles

Precedent for operating at negative equity 15% of GDP

Based on shareholder interest after restructuring – difficult to quantify

Commercial Bank deposits with BdL should be treated as the more senior liabilities

Critical for accelerating USD liquidity

Creates opportunities for depositors to invest their saving

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APPROACH FOR RESTORING THE LEBANESE FINANCIAL SECTOR

Case brief – Uber

SIZING THE FINANCIAL SECTOR LOSSES

GAP REDUCTION: DEPOSITORS

Identify main drivers that have led to significant losses in the financial sector
FX exposure, Eurobond haircut, NPLs & other impairments
Size the impact of loss drivers on the balance sheets of BdL and the commercial banks
Establish key principles for distributing the losses

Size the remaining gap to be borne by depositors
Propose a liquidity mechanism for releasing deposit to rightful owners
Recommend an approach for distributing remaining losses to depositor through bail-in and nominal deposit reduction

Marco-economic & other consideration

Identify key macro-economic consideration to be addressed:
Inflationary impact, return to private sector lending & increasing investments
Highlight other considerations

GAP REDUCTION: GOVERNMENT AND BANKS

Define a list of the potential gap-reducing initiatives and checking their alignment with the principles
Size the impact of the initiatives on closing the financial sector gap
Restate BdL and Bank balance sheets as a result of the adjustments made

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THE LOSS DISTRIBUTION INITIATIVES AIMED AT THE CENTRAL BANK, COMMERCIAL BANKS AND GOVERNMENT COVER USD 25.8 BN OF THE GAP

Potential mechanism across the different parties

25.8

GOVERNMENT

Student rewards

5

Recoup stolen funds

1

Write-off BDL liabilities

4

6

Mechanism

Shareholder capital & Subordinate Debt

6

Gap contribution

USD BN

CENTRAL

BANK

COMMERCIAL

BANKS

Set up a mechanism to recover embezzled public funds and smuggled deposits

Comment

Brief description

Remove the gold appreciation liability

Write-off all shareholder capital

0.8

9.6

Mechanism to yield outcome in the medium to long term - value to be determined (TBD.)

Total contribution to gap

Government, central bank and commercials banks

69.1

Total Gap

43.3

Remaining gap

to be addressed by depositors

Operate at negative equity

5

Operate the central bank at a maximum potential negative equity

3.3

Negative operation estimated at 15% of 2021 est. GDP

Wipe BDL capital account

3.1

Bail-in holders of subordinated loans and bonds and other banking sector creditors

1.3

Write-off 70% of MLT banks and other corp.

0.7

Write-off of debt due to the Central Bank

2.0

Realizing effectively unrealized gains

Zeroing capital of BdL

Similar treatment as Bank deposits @BdL

8.8bn in USD and 0.7bn in LBP @20,000

1.1bn in USD and 0.2bn in LBP @20,000

Given that BdL will write-off a greater amount owed to Banks

Recapitalize Financial Sector

2

Create PPP investment opportunities

3

Sell or transfer state assets or issue securities to BDL, recapitalize the banks

Leverage the state assets to define PPP projects

5.0

Kept off BdL and Commercial Bank Balance sheets

Could be used to increase usability of deposits, allowing them to generate a return

23

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BDL’S RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION

Liabilities (inc. equity)
FX liabilities	93	89	37	18	18
o/w deposits	86	86	34	15	15
o/w capital account	3	0	0	0	0
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	5	1	1	20	20
o/w currency in circulation	2	2	2	2	2
o/w banks deposits	1	1	1	20	20
o/w valuation adjustment	1	0	0	0	0
o/w capital account	0	-3	-3	-3	-3
o/w other	1	1	1	1	1
Total Liabilities	98	90	38	38	38

Equity impact	-60	-52	0	0	0
Net FX Position	-75	-71	-19	0	0

Updated balance sheet				Result

Assets - USD BN
FX assets	34	34	34	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	1	1	1	1	1
o/w claims on banks	0	0	0	0	0
o/w other	4	4	4	4	4
LBP assets	4	4	4	4	4
o/w seigniorage assets	0	0	0	0	0
o/w other (T-bills, etc..)	4	4	4	4	4
Total Assets	38	38	38	38	38

BDL balance sheet�USD BN

Post initiatives: �negative equity, wiped Capital Acct, wiped gold valuations adjustment

Haircutting Deposits of Banks

Lirafying remaining bank deposits

CENTRAL BANK

Excluding the value of gold

As it cannot provide liquidity to the banking sector

24

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BDL’S RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION

Liabilities (inc. equity)
FX liabilities	93	89	37	18	18
o/w deposits	86	86	34	15	15
o/w capital account	3	0	0	0	0
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	5	1	1	20	20
o/w currency in circulation	2	2	2	2	2
o/w banks deposits	1	1	1	20	20
o/w valuation adjustment	1	0	0	0	0
o/w capital account	0	-3	-3	-3	-3
o/w other	1	1	1	1	1
Total Liabilities	98	90	38	38	38

Equity impact	-60	-52	0	0	0
Net FX Position	-75	-71	-19	0	0

Updated balance sheet				Result

Assets - USD BN
FX assets	34	34	34	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	1	1	1	1	1
o/w claims on banks	0	0	0	0	0
o/w other	4	4	4	4	4
LBP assets	4	4	4	4	4
o/w seigniorage assets	0	0	0	0	0
o/w other (T-bills, etc..)	4	4	4	4	4
Total Assets	38	38	38	38	38

BDL balance sheet�USD BN

Post initiatives: �negative equity, wiped Capital Acct, wiped gold valuations adjustment

Haircutting Deposits of Banks

Lirafying remaining bank deposits

CENTRAL BANK

Wipe of capital account

Apply negative equity

Excluding the value of gold

As it cannot provide liquidity to the banking sector

25

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BDL’S RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION

Liabilities (inc. equity)
FX liabilities	93	89	37	18	18
o/w deposits	86	86	34	15	15
o/w capital account	3	0	0	0	0
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	5	1	1	20	20
o/w currency in circulation	2	2	2	2	2
o/w banks deposits	1	1	1	20	20
o/w valuation adjustment	1	0	0	0	0
o/w capital account	0	-3	-3	-3	-3
o/w other	1	1	1	1	1
Total Liabilities	98	90	38	38	38

Equity impact	-60	-52	0	0	0
Net FX Position	-75	-71	-19	0	0

Updated balance sheet				Result

Assets - USD BN
FX assets	34	34	34	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	1	1	1	1	1
o/w claims on banks	0	0	0	0	0
o/w other	4	4	4	4	4
LBP assets	4	4	4	4	4
o/w seigniorage assets	0	0	0	0	0
o/w other (T-bills, etc..)	4	4	4	4	4
Total Assets	38	38	38	38	38

BDL balance sheet�USD BN

Post initiatives: �negative equity, wiped Capital Acct, wiped gold valuations adjustment

Haircutting Deposits of Banks

Lirafying remaining bank deposits

CENTRAL BANK

Haircutting the bank deposits at BDL and passing on the losses the banks

Excluding the value of gold

As it cannot provide liquidity to the banking sector

26

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BDL’S RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION

CENTRAL BANK

Liabilities (inc. equity)
FX liabilities	93	89	37	18	18
o/w deposits	86	86	34	15	15
o/w capital account	3	0	0	0	0
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	5	1	1	20	20
o/w currency in circulation	2	2	2	2	2
o/w banks deposits	1	1	1	20	20
o/w valuation adjustment	1	0	0	0	0
o/w capital account	0	-3	-3	-3	-3
o/w other	1	1	1	1	1
Total Liabilities	98	90	38	38	38

Equity impact	-60	-52	0	0	0
Net FX Position	-75	-71	-19	0	0

Updated balance sheet				Result

Assets - USD BN
FX assets	34	34	34	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	1	1	1	1	1
o/w claims on banks	0	0	0	0	0
o/w other	4	4	4	4	4
LBP assets	4	4	4	4	4
o/w seigniorage assets	0	0	0	0	0
o/w other (T-bills, etc..)	4	4	4	4	4
Total Assets	38	38	38	38	38

BDL balance sheet�USD BN

Post initiatives: �negative equity, wiped Capital Acct, wiped gold valuations adjustment

Haircutting Deposits of Banks

Lirafying remaining bank deposits

Match remaining FX deposits with available FX assets �(currency and Eurobonds excluding gold) …

…and lirafy the rest

Excluding the value of gold

As it cannot provide liquidity to the banking sector

27

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BDL’S RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION

CENTRAL BANK

Liabilities (inc. equity)
FX liabilities	93	89	37	18	18
o/w deposits	86	86	34	15	15
o/w capital account	3	0	0	0	0
o/w foreign liabilities	1	1	1	1	1
o/w other	2	2	2	2	2
LBP liabilities	5	1	1	20	20
o/w currency in circulation	2	2	2	2	2
o/w banks deposits	1	1	1	20	20
o/w valuation adjustment	1	0	0	0	0
o/w capital account	0	-3	-3	-3	-3
o/w other	1	1	1	1	1
Total Liabilities	98	90	38	38	38

Equity impact	-60	-52	0	0	0
Net FX Position	-75	-71	-19	0	0

Updated balance sheet				Result

CENTRAL BANK

Assets - USD BN
FX assets	34	34	34	34	34
o/w gold	16	16	16	16	16
o/w currency	13	13	13	13	13
o/w Eurobonds	1	1	1	1	1
o/w claims on banks	0	0	0	0	0
o/w other	4	4	4	4	4
LBP assets	4	4	4	4	4
o/w seigniorage assets	0	0	0	0	0
o/w other (T-bills, etc..)	4	4	4	4	4
Total Assets	38	38	38	38	38

BDL balance sheet�USD BN

Post initiatives: �negative equity, wiped Capital Acct, wiped gold valuations adjustment

Haircutting Deposits of Banks

Lirafying remaining bank deposits

28

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BANKS’ RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION � �

Liabilities (inc. equity)
FX liabilities	124	122	112	64	48	43
o/w private sector deposits (lollars)	104	104	104	56	35	35
o/w fresh USD money	1	1	1	1	1	1
o/w capital account	9	9	0	0	0	0
o/w debt	3	3	1	1	1	1
o/w due to BDL	2	0	0	0	0	0
o/w Other FX liabilities	6	6	6	6	6	6
LBP liabilities	4	3	2	2	21	23
o/w private sector deposits	2	2	2	2	21	23
o/w capital account	1	1	0	0	0	0
o/w debt	~0	0	0	0	0	0
o/w due to BDL	1	0	0	0	0	0
o/w Other liabilities	~0	~0	~0	~0	~0	~0
Total Liabilities	128	125	114	66	66	66

Equity impact	-9	-59	-48	-	-	-
Net FX Position	-10	-79	-69	-21	-	-
Incremental equity impact		-50	+11	+48	-

Updated balance sheet					Result

Assets - USD BN
FX assets	114	48	43	43	43	43
o/w Deposits @BdL	86	15	15	15	15	15
o/w Claims on private sector	11	11	11	11	11	11
o/w Eurobonds	1	1	1	1	1	1
o/w Others FX assets	16	16	16	16	16	16
LBP assets	5	23	23	23	23	23
o/w Deposits @BdL	2	21	21	21	21	21
o/w other (T-bills, claim on private sector, etc..)	3	3	3	3	3	3
Total Assets	119	66	66	66	66	66

Commercial banks balance sheet�USD BN

Post BdL Haircut on Bank deposits

Wiping equity and bailing-in creditors

Zero equity

Reducing deposit value

COMMERCIAL BANKS

29

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BANKS’ RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION � �

COMMERCIAL BANKS

Liabilities (inc. equity)
FX liabilities	124	122	112	64	48	43
o/w private sector deposits (lollars)	104	104	104	56	35	35
o/w fresh USD money	1	1	1	1	1	1
o/w capital account	9	9	0	0	0	0
o/w debt	3	3	1	1	1	1
o/w due to BDL	2	0	0	0	0	0
o/w Other FX liabilities	6	6	6	6	6	6
LBP liabilities	4	3	2	2	21	23
o/w private sector deposits	2	2	2	2	21	23
o/w capital account	1	1	0	0	0	0
o/w debt	~0	0	0	0	0	0
o/w due to BDL	1	0	0	0	0	0
o/w Other liabilities	~0	~0	~0	~0	~0	~0
Total Liabilities	128	125	114	66	66	66

Equity impact	-9	-59	-48	-	-	-
Net FX Position	-10	-79	-69	-21	-	-
Incremental equity impact		-50	+11	+48	-

Updated balance sheet					Result

Assets - USD BN
FX assets	114	48	43	43	43	43
o/w Deposits @BdL	86	15	15	15	15	15
o/w Claims on private sector	11	11	11	11	11	11
o/w Eurobonds	1	1	1	1	1	1
o/w Others FX assets	16	16	16	16	16	16
LBP assets	5	23	23	23	23	23
o/w Deposits @BdL	2	21	21	21	21	21
o/w other (T-bills, claim on private sector, etc..)	3	3	3	3	3	3
Total Assets	119	66	66	66	66	66

Commercial banks balance sheet�USD BN

Post BdL Haircut on Bank deposits

Wiping equity and bailing-in creditors

Zero equity

Reducing deposit value

Apply of BdL exposure

Lirafy the FX deposits from USD 86BN to 15BN…

… to increase LBP deposits by the equivalent of USD 19BN

And wipe out dues to BdL

30

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BANKS’ RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION � �

Liabilities (inc. equity)
FX liabilities	124	122	112	64	48	43
o/w private sector deposits (lollars)	104	104	104	56	35	35
o/w fresh USD money	1	1	1	1	1	1
o/w capital account	9	9	0	0	0	0
o/w debt	3	3	1	1	1	1
o/w due to BDL	2	0	0	0	0	0
o/w Other FX liabilities	6	6	6	6	6	6
LBP liabilities	4	3	2	2	21	23
o/w private sector deposits	2	2	2	2	21	23
o/w capital account	1	1	0	0	0	0
o/w debt	~0	0	0	0	0	0
o/w due to BDL	1	0	0	0	0	0
o/w Other liabilities	~0	~0	~0	~0	~0	~0
Total Liabilities	128	125	114	66	66	66

Equity impact	-9	-59	-48	-	-	-
Net FX Position	-10	-79	-69	-21	-	-
Incremental equity impact		-50	+11	+48	-

Updated balance sheet					Result

Assets - USD BN
FX assets	114	48	43	43	43	43
o/w Deposits @BdL	86	15	15	15	15	15
o/w Claims on private sector	11	11	11	11	11	11
o/w Eurobonds	1	1	1	1	1	1
o/w Others FX assets	16	16	16	16	16	16
LBP assets	5	23	23	23	23	23
o/w Deposits @BdL	2	21	21	21	21	21
o/w other (T-bills, claim on private sector, etc..)	3	3	3	3	3	3
Total Assets	119	66	66	66	66	66

Commercial banks balance sheet�USD BN

Post BdL Haircut on Bank deposits

Wiping equity and bailing-in creditors

Zero equity

Reducing deposit value

COMMERCIAL BANKS

Wipe out equity and reduce debt

Wipe out equity and debt

31

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BANKS’ RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION � �

Liabilities (inc. equity)
FX liabilities	124	122	112	64	48	43
o/w private sector deposits (lollars)	104	104	104	56	35	35
o/w fresh USD money	1	1	1	1	1	1
o/w capital account	9	9	0	0	0	0
o/w debt	3	3	1	1	1	1
o/w due to BDL	2	0	0	0	0	0
o/w Other FX liabilities	6	6	6	6	6	6
LBP liabilities	4	3	2	2	21	23
o/w private sector deposits	2	2	2	2	21	23
o/w capital account	1	1	0	0	0	0
o/w debt	~0	0	0	0	0	0
o/w due to BDL	1	0	0	0	0	0
o/w Other liabilities	~0	~0	~0	~0	~0	~0
Total Liabilities	128	125	114	66	66	66

Equity impact	-9	-59	-48	-	-	-
Net FX Position	-10	-79	-69	-21	-	-
Incremental equity impact		-50	+11	+48	-

Updated balance sheet					Result

Assets - USD BN
FX assets	114	48	43	43	43	43
o/w Deposits @BdL	86	15	15	15	15	15
o/w Claims on private sector	11	11	11	11	11	11
o/w Eurobonds	1	1	1	1	1	1
o/w Others FX assets	16	16	16	16	16	16
LBP assets	5	23	23	23	23	23
o/w Deposits @BdL	2	21	21	21	21	21
o/w other (T-bills, claim on private sector, etc..)	3	3	3	3	3	3
Total Assets	119	66	66	66	66	66

Commercial banks balance sheet�USD BN

Post BdL Haircut on Bank deposits

Wiping equity and bailing-in creditors

Zero equity

Reducing deposit value

COMMERCIAL BANKS

Balance equity to Zero by reducing depositor value

32

33 of 59

BANKS’ RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION � �

Liabilities (inc. equity)
FX liabilities	124	122	112	64	48	43
o/w private sector deposits (lollars)	104	104	104	56	35	35
o/w fresh USD money	1	1	1	1	1	1
o/w capital account	9	9	0	0	0	0
o/w debt	3	3	1	1	1	1
o/w due to BDL	2	0	0	0	0	0
o/w Other FX liabilities	6	6	6	6	6	6
LBP liabilities	4	3	2	2	21	23
o/w private sector deposits	2	2	2	2	21	23
o/w capital account	1	1	0	0	0	0
o/w debt	~0	0	0	0	0	0
o/w due to BDL	1	0	0	0	0	0
o/w Other liabilities	~0	~0	~0	~0	~0	~0
Total Liabilities	128	125	114	66	66	66

Equity impact	-9	-59	-48	-	-	-
Net FX Position	-10	-79	-69	-21	-	-
Incremental equity impact		-50	+11	+48	-

Updated balance sheet					Result

Assets - USD BN
FX assets	114	48	43	43	43	43
o/w Deposits @BdL	86	15	15	15	15	15
o/w Claims on private sector	11	11	11	11	11	11
o/w Eurobonds	1	1	1	1	1	1
o/w Others FX assets	16	16	16	16	16	16
LBP assets	5	23	23	23	23	23
o/w Deposits @BdL	2	21	21	21	21	21
o/w other (T-bills, claim on private sector, etc..)	3	3	3	3	3	3
Total Assets	119	66	66	66	66	66

Commercial banks balance sheet�USD BN

Post BdL Haircut on Bank deposits

Wiping equity and bailing-in creditors

Zero equity

Reducing deposit value

COMMERCIAL BANKS

Reduce FX deposits by Lirafication…

…to neutralize the bank FX position

33

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BANKS’ RESTATED BALANCE SHEET - POST LOSS DISTRIBUTION � �

COMMERCIAL BANKS

Liabilities (inc. equity)
FX liabilities	124	122	112	64	48	43
o/w private sector deposits (lollars)	104	104	104	56	35	35
o/w fresh USD money	1	1	1	1	1	1
o/w capital account	9	9	0	0	0	0
o/w debt	3	3	1	1	1	1
o/w due to BDL	2	0	0	0	0	0
o/w Other FX liabilities	6	6	6	6	6	6
LBP liabilities	4	3	2	2	21	23
o/w private sector deposits	2	2	2	2	21	23
o/w capital account	1	1	0	0	0	0
o/w debt	~0	0	0	0	0	0
o/w due to BDL	1	0	0	0	0	0
o/w Other liabilities	~0	~0	~0	~0	~0	~0
Total Liabilities	128	125	114	66	66	66

Equity impact	-9	-59	-48	-	-	-
Net FX Position	-10	-79	-69	-21	-	-
Incremental equity impact		-50	+11	+48	-

Updated balance sheet					Result

Assets - USD BN
FX assets	114	48	43	43	43	43
o/w Deposits @BdL	86	15	15	15	15	15
o/w Claims on private sector	11	11	11	11	11	11
o/w Eurobonds	1	1	1	1	1	1
o/w Others FX assets	16	16	16	16	16	16
LBP assets	5	23	23	23	23	23
o/w Deposits @BdL	2	21	21	21	21	21
o/w other (T-bills, claim on private sector, etc..)	3	3	3	3	3	3
Total Assets	119	66	66	66	66	66

Commercial banks balance sheet�USD BN

Post BdL Haircut on Bank deposits

Wiping equity and bailing-in creditors

Zero equity

Reducing deposit value

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APPROACH FOR RESTORING THE LEBANESE FINANCIAL SECTOR

Case brief – Uber

SIZING THE FINANCIAL SECTOR LOSSES

Identify main drivers that have led to significant losses in the financial sector
FX exposure, Eurobond haircut, NPLs & other impairments
Size the impact of loss drivers on the balance sheets of BdL and the commercial banks
Establish key principles for distributing the losses

Marco-economic & other consideration

Identify key macro-economic consideration to be addressed:
Inflationary impact, return to private sector lending & increasing investments
Highlight other considerations

GAP REDUCTION: GOVERNMENT AND BANKS

Define a list of the potential gap-reducing initiatives and checking their alignment with the principles
Size the impact of the initiatives on closing the financial sector gap
Restate BdL and Bank balance sheets as a result of the adjustments made

GAP REDUCTION: DEPOSITORS

Size the remaining gap to be borne by depositors
Propose a liquidity mechanism for releasing deposit to rightful owners
Recommend an approach for distributing remaining losses to depositor through bail-in and nominal deposit reduction

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DEPOSITS ARE REDUCED BY USD ~48BN AND LIRAFIED BY 37% TO RETURN THE BANKS TO SOLVENCY AND CLOSE THEIR FX POSITION-

Depositors value evolution
USD BN

THE GAP WILL BE ADDRESSED WITH A BAIL-IN AND A NOMINAL HAIRCUT:

Remaining deposits

104.1

(97.6%)

43.3

Remaining gap

To be contributed by depositors

BAIL-IN

A

NOMINAL REDUCTION IN VALUE

B

Offer high net worth depositors' equity in the commercial banks in lieu of part of their deposits

Based on the source and size of the account, reduce the value of the deposits through a lirafication at sub-market rate

XX

Value in US Dollar

Value in Lebanese Lira

Resulting value of deposits

35.1

(63%)

20.7�(37%)

55.8

5.0

Government contribution

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12BN IN DEPOSITS WILL BE BAILED-IN TO OWN 72% OF THE BANKING SECTOR – 28% WILL BE OWNED BY BAILED-IN BANK SHAREHOLDERS & CREDITORS

Depositor bail-in range

Future bank assets

(USD BN)

54

Return on Assets (ROA)

Based on regional comps

1.3%

Price to Earnings (P/E)�Based on regional comps

9

Potential future banking sector value �(USD BN)

6.3

A

Low case

Base case

Best case

69

92

1.8%

13

2.2%

13

16.1

26.3

Creditors

DEPOSITORS

Shareholders

8%

72%

20%

USD 1 BN

USD 12 BN

USD 3 BN

Share

Value

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IF THE BANK SHAREHOLDERS RECAPITALIZE THE BANKS WITH USD ~1BN FRESH FUNDS, DEPOSITOR OWNERSHIP WILL BE DILUTED TO 43%

A

CREDITORS

DEPOSITORS

SHAREHOLDERS

8%

72%

20%

Share

w/o

recapitalization

Banks

If banks shareholders recapitalize the banks with fresh USD 1 BN…

Shareholder

Depositors

Creditors

USD 1 BN

fresh

Share

Post

recapitalization

5%

43%

52%

… depositors and creditors ownership will be diluted

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WE NEED TO DEFINE HOW THE 12BN BAIL-IN AND A RESULTING 36BN NOMINAL HAIRCUT WILL BE DISTRIBUTED ACROSS THE DEPOSITORS

SEGMENTATION OF DEPOSITS / DEPOSITORS:

Remaining deposits

104.1

(97.6%)

12

BAIL-IN

A

Depositors value evolution
USD BN

36.3

B

NOMINAL REDUCTION IN VALUE

XX

Value in US Dollar

Value in Lebanese Lira

Which depositors will receive the bail-in?

Which depositors will get a nominal reduction in value?

How can we segment depositors to make sure we conduct a fair distribution?

How can we protect the most vulnerable depositors?

Resulting value of deposits

35.1

(63%)

20.7�(37%)

55.8

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WE SEGMENTED THE DEPOSITS IN 3, BASED ON HOW MUCH THEY BENEFITED FROM THE PREVIOUS FINANCIAL REGIME

Segmentation of deposits…

Source of deposit; principal. Interest, preferential dollarization

INTEREST

Value from high interest rates given since 2015

1

Remaining value in deposits that didn’t benefit from the previous financial regime

PRINCIPAL

NEW LOLLAR

New dollars introduced into accounts post Oct 2019 (Excluding fresh USD)

2

3

Details in following slides…

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1| INTEREST: VALUE IN DEPOSITS THAT ORIGINATED FROM THE ACCUMULATION OF INTEREST WILL BE LIRAFIED AND ITS VALUE REDUCED BY 75% �

Segmentation of deposits… … and corresponding reasoning

Source of deposit; principal. Interest, preferential dollarization

INTEREST

High interest rates given since 2015

1

Estimated value: �USD 16 BN

Remaining deposits that didn’t benefit from the previous financial regime

PRINCIPAL

NEW LOLLAR

New dollars into accounts post Oct 2019 (Excluding fresh USD)

2

3

Description:

All value in the depositors’ accounts that were accumulated from high interest rate given since 2015 (average of 4-5%)

Treatment:

Interest rates were high on USD and Lira given the country risk:

The risk materialized, so instead of loss of principal the recommendation is to correct the interest (to a more appropriate value of 1-2%)
Also, many high-value depositors took most of their funds out with exception to some remaining deposits that can be mainly or fully categorized as interest. Therefore, this approach will allow those depositors to contribute to the losses.

Hence all interest earned since 2015 will lirafied at a rate that will reduce its value by 75%

Estimated value: USD 16 BN

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2| NEW LOLLAR: ANY DOLLARIZATION OR TRANSFER POST OCT-2019 IS CONSIDERED A NEW LOLLAR WHICH WILL BE LIRAFIED WITH ITS VALUE DECREASED BY 40%

Segmentation of deposits… … and corresponding reasoning

Source of deposit; principal. Interest, preferential dollarization

INTEREST

High interest rates given since 2015

1

Estimated value: �USD 16 BN

Remaining deposits that didn’t benefit from the previous financial regime

PRINCIPAL

NEW LOLLAR

New dollars into accounts post Oct 2019 (Excluding fresh USD)

2

3

Description:

Post October 2019, the banks suffered a bank run which made foreign currency deposits not equal:

Conversion at original 1,500 rate despite a much higher parallel black market
Banks offered mark-up transactions for converting fresh USD to Lollar
Real estate transactions occurred whereby buyers sold their properties in local dollars (Lollar) at a multiple of the price in fresh dollars
And other similar transactions (e.g black market of bank cheques)

Basically, all New Lollars introduced in the deposits post Oct-2019 are targeted: Dollarization (estimated at 50% of all new Lollar) and Transfers (the other 50%)

Treatment:

All New Lollars will be lirafied at a rate that will reduce its value by 40%

Estimated value: USD 35 BN

Estimated value: �USD 35 BN

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3| PRINCIPAL: ALL REMAINING VALUE IN THE ACCOUNTS THAT DIDN’T BENEFIT FROM THE FINANCIAL REGIME SHOULD BE PRESERVED�

Segmentation of deposits… … and corresponding reasoning

Source of deposit; principal. Interest, preferential dollarization

INTEREST

High interest rates given since 2015

1

Estimated value: �USD 16 BN

Remaining deposits that didn’t benefit from the previous financial regime

PRINCIPAL

NEW LOLLAR

New dollars into accounts post Oct 2019 (Excluding fresh USD)

2

3

Description:

Remaining deposits who didn’t benefit from the above transactions. Those are the principal of the accounts pre-October 2019.

Those deposits can be divided into:

Low value: All principal value in accounts below USD 150K�Estimated USD 25BN
Mid value: All principal value in accounts between USD 150- 500K �Estimated USD 10BN
High value: All principal value in accounts above USD 500K�Estimated USD 20BN

Treatment:

All principals in the accounts should be preserved:

Low value principal preserved in fresh USD
Mid value principal preserved in LBP
High value principal is bailed-in and receive perpetual

Estimated value: USD 53 BN

Estimated value: �USD 35 BN

Estimated value: �USD 55 BN

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INTEREST AND NEW LOLLAR DEPOSITS WILL CONTRIBUTE THE MOST WHILE LOW AND MID VALUE PRINCIPAL DEPOSITS WILL BE PROTECTED

Deposits value

53

PRINCIPAL

35

NEW LOLLAR

16

INTEREST

Treatment

Sub segmentation value

16 BN

35 BN

25 BN

6 BN

22 BN

25%
Value preservation
75% Nominal value reduction

Repayment mechanism

Paid in LBP
33% based on USD FX rate at time of payment

Resulting value

USD 4 BN

Contribution

12 BN

Low value (<150K)

Mid value (150-500K)

High value (>500K)

100%
Value preservation

100%
Value preservation

55% Bail-in

45% Perpetual

Paid in LBP
33% based on USD FX rate at time of payment

USD 21 BN

14 BN

Paid in USD

USD 25 BN

-

Paid in LBP
33% based on USD FX rate at time of payment

USD 6 BN

-

Bank shares

-

12 BN

Paid in LBP
100% USD back
Off Balance sheet

USD 5 BN

10 BN

104

48 BN

58 BN

ل.ل.

US$

ل.ل.

60%
Value preservation
40% Nominal value reduction

ل.ل.

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98% OF ALL PRINCIPAL DEPOSIT WILL BE PAID BACK IN FULL IN USD OF LBP AT MARKET RATE

Recovery value

USD 150K principal

100%

150K

Principal

150K

Protected USD

Pre

Post

100%

US$

adjustment

XX%

Recovery value

US$

ل.ل.

Payment:

in USD

in LBP

USD 500K principal

500K

Principal

150K

Protected USD

Pre

Post

100%

adjustment

350K

In Lira

33% USD backed

ل.ل.

100%

ل.ل.

USD 1MN principal

1MN

Principal

150K

Protected USD

Pre

Post

100%

US$

adjustment

350K

In Lira

33% USD backed

270K

Bail-in

50%

75%

230K

Perpetual

50%

USD 2MN principal

2MN

Principal

150K

Protected USD

Pre

Post

100%

US$

adjustment

350K

In Lira

33% USD backed

820K

Bail-in

ل.ل.

50%

63%

680K

Perpetual

50%

98% of deposits

99% of deposits

US$

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CONTRIBUTIONS FROM THE GOVERNMENT, CENTRAL BANK, COMMERCIAL BANKS AND DEPOSITORS WILL HELP COVER THE USD 69 BN GAP

GAP breakdown and contribution
USD BN, as of Sept 2021

Total gap

-69

-9

-60

Government

Interest category

Capital reduction, negative equity operation and gold value realization

Banks

Depositors

New Lollar category

Bail in of

Principal for High net worth depositors

Shareholder capital reduction

BDL

Perpetual

Net open FX position, sovereign default and seigniorage

Banks

Net open FX position, sovereign default

BDL

0

8

13

12

14

10

12

Capital requirements will create book equity in the banks

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APPROACH FOR RESTORING THE LEBANESE FINANCIAL SECTOR

Case brief – Uber

SIZING THE FINANCIAL SECTOR LOSSES

GAP REDUCTION: DEPOSITORS

Identify main drivers that have led to significant losses in the financial sector
FX exposure, Eurobond haircut, NPLs & other impairments
Size the impact of loss drivers on the balance sheets of BdL and the commercial banks
Establish key principles for distributing the losses

Size the remaining gap to be borne by depositors
Propose a liquidity mechanism for releasing deposit to rightful owners
Recommend an approach for distributing remaining losses to depositor through bail-in and nominal deposit reduction

GAP REDUCTION: GOVERNMENT AND BANKS

Define a list of the potential gap-reducing initiatives and checking their alignment with the principles
Size the impact of the initiatives on closing the financial sector gap
Restate BdL and Bank balance sheets as a result of the adjustments made

Marco-economic & other consideration

Identify key macro-economic consideration to be addressed:
Bank restructuring, Inflationary management
Highlight other considerations

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BANK RESTRUCTURING AND INFLATION MANAGEMENT WILL BE ADDRESSED TO MAXIMIZE GROWTH

Macro-economic implications

BANKING SECTOR STRUCTURING

Even after major adjustments, bank assets to GDP is still among the largest in the world at >250% GDP…
…while private sector debt to GDP is significantly below benchmarks at ~50%
This is explained by a dramatic level of BdL lending
The make up of the Lebanese banking sector complicates liquidity and distracts from core banking business
RIGHT-SIZING OF THE BANK BALANCE SHEETS can reorient banks to funding growth in the productive sectors of the economy
Smaller balance sheets, with less exposure to BdL, reduces risk and offers a fresh start in which capital and liquidity requirements can be met by the strongest players

INFLATION MANAGEMENT

Money supply in lira is expected to grow exponentially increasing narrow money supply significantly
Inflation is significant risk if money supply grows too quickly and at a faster rate than economic output.
High inflation will counteract all efforts to recover deposits as their real value and the depositors purchase power will decrease
TIMING DEPOSITS, IMPOSING CONTROLS ON CASH, INCREASING RESERVES AND INTEREST RATES are all powerful tools that will play a role

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BANK RESTRUCTURING AND INFLATION MANAGEMENT WILL BE ADDRESSED TO MAXIMIZE GROWTH

Macro-economic implications

BANKING SECTOR STRUCTURING

Even after major adjustments, bank assets to GDP is still among the largest in the world at >250% GDP…
…while private sector debt to GDP is significantly below benchmarks at ~50%
This is explained by a dramatic level of BdL lending
The make up of the Lebanese banking sector complicates liquidity and distracts from core banking business
RIGHT-SIZING OF THE BANK BALANCE SHEETS can reorient banks to funding growth in the productive sectors of the economy
Smaller balance sheets, with less exposure to BdL, reduces risk and offers a fresh start in which capital and liquidity requirements can be met by the strongest players

INFLATION MANAGEMENT

Money supply in lira is expected to grow exponentially increasing narrow money supply significantly
Inflation is assured if money supply grows too quickly and at a faster rate than economic output.
High inflation will counteract all efforts to recover deposits as their real value and the depositors purchase power will decrease
TIMING DEPOSITS, IMPOSING CONTROLS ON CASH, INCREASING RESERVES AND INTEREST RATES are all powerful tools that will play a role

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BY REDUCING THE SIZE OF THE BANKS’ BALANCE SHEETS THROUGH AN AMC, CAPITAL AND LIQUIDITY REQUIREMENTS WOULD BECOME EASIER TO ACHIEVE AND DEPOSITORS WILL GAIN ACCESS TO THEIR FUNDS FASTER

1

AMC ASSETS AND LIABILITIES

35.8

Claims on BdL

12.0

Loans

6.3

Investments

2.4

Bonds

6.7

Deposits with FIs

3.4

Others Assets

3.6

New Deposits

1.8

Debt & Provisions

5.3

Dues to FIs

Old Deposits

Capital and Liquidity requirements driving access to funds and return to normalcy

Loans

Investments

Bonds

Deposits with FIs

Others Assets

Claims on BdL

New Deposits

Debt & Provisions

Dues to FIs

56

Old Deposits

5

New Gov. bond

36

Old Deposits

31

Claims on BdL

2

CONSOLIDATE BANK BALANCE SHEET

Investments and securitization to promise higher returns for depositors

Current structure

Proposed new structure

Assets

Liabilities

Assets

Liabilities

31 BN less in Old deposits

25bn left only (<150k accounts)

Everything stays the same except for the USD 31BN less in Claims on BDL

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THE AMC STRUCTURE WILL OWNED BY THE GOVERNMENT/BDL, EMPLOY REPUTABLE ASSET MANAGERS AND WILL ACT PARTY AS AN INFRA FUND, GENERATING A RETURN AND INCREASING VALUE TO DEPOSITORS

AMC high level structure

Asset Management Company

AMC

Ownership

Government and BdL

Management

International reputable asset managers

SECURITIZATION OF ASSETS

Securitize Assets into long-term (15 year) linearly amortizing securities

NATIONAL INFRASTRUCTURE DEVELOPMENT FUND

Use liquidity provided by deposits @BdL to develop and upgrade infrastructure with predictable return profile and increase economic output

Electricity production
Port reconstruction
Other transportation development
Fixed broadband upgrade

USD 36BN �Securities held by depositors

3%

XX%

Rate of yearly expected return

Detailed in later slides

Assets

Activities

Creditors

15%

USD 5BN�Government perpetual bonds
USD 20BN �Deposits with BdL �(in LBP)
USD 11BN �Deposits with BdL �(in USD)

AMC main acitivities

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SECURITIZATION WITH 15-YEAR AMORTIZING ABS WILL HAVE MANY BENEFITS FOR DEPOSITORS

Benefits of securitization for the depositors

Increase remaining deposit value by sharing the interest income of assets backing the securities with depositors

Transparent pay-back period – similar to BdL 158 – offering depositors a clear time-line for getting access to their funds

Tradable, allowing depositors access to liquidity from the secondary market

Serve as collateral for private sector loans in both USD & LBP, promoting economic growth

Can be designed as opt-in rather than force swapped

Can be swapped into equity in government PPP projects, increasing liquidity and value

Value increase

Transparency

Tradability

Utility as collateral

Liberty of opting in

Utility as investment

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THE AMC CAN GENERATE ADDITIONAL VALUE TO DEPOSITORS WHILE DEVELOPING INFRASTRUCTURE THAT INCREASES ECONOMIC OUTPUT, IMPROVES LIVING CONDITIONS AND DECREASES IMPORTS

Securitization through ABS
In USD BN

Value asset within the AMC

USING ABSs TO INCREASE DEPOSITOR VALUE

Cash

~47

USD 1.6BN invested in two power production facilities 17% returns based on international benchmarks, asset stay with government after 15 years
USD 5BN government bond with a 5% coupon �callable as 0 USD after 15 years
USD 10BN (in USD) generating 2% return �and being liquidated over time
USD 20BN (in LBP) generating 5% return �and being liquidated over time

Cumulative cash pay-out by ABS

15 years ABS

BdL Deposits

~36

Gov. Bond

Infra Project

ILLUSTRATIVE

NUMBERS TO BE UPDATED WITH ADDITIONAL DATA RECEIVED

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THE GOVERNMENT CAN REMOVE LIQUIDITY FROM THE MARKET, INCREASE DEPOSITOR VALUE AND IMPROVE INFRASTRUCTURE BY INVESTING IN ELECTRICITY PRODUCTION

Example of potential PPP project

Introduction

Lebanon needs a comprehensive solution for its electricity sector to:

Reduce the fiscal deficit and balance of payment deficit from the heavy imports of diesel/HFO
Enable economic recovery following a reduction in cost of electricity
Bridge the electricity supply gap and provide base load electricity
Reduce fuel costs by switching to gas and renewables
Rebalance EDL financials by adjusting the tariff, reducing costs/losses and improving collection.
Improve governance and transparency

Solution

A solution could be a comprehensive project across generation, transmission and distribution; that enable reforms and the deployment of renewables.
The funding leverages the banking crisis to propose a bespoke financing solution which is not contingent on foreign financial aid. Therefore, the project can be launched imminently.
Share of the ABS will be converted on a mandatory pro rata basis to shares in a new project company
Fresh dollars for the project will be provided at a discount by BDL to provide the needed funds for the EPC contract, BDL therefore reduces its FX gap.
Over the project life, the depositors who hold these shares recover their initial investment in fresh dollar equivalent (or in LBP at market rate)

Banking Sector Crisis

Electricity Sector Crisis

Funding is local, reduces BDL’s FX gap, and allows a fully recovery of deposits over the project life

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STRICT AND MANDATORY CAPITAL AND LIQUIDITY REQUIREMENTS WILL BE IMPOSED ON THE BANKING SECTOR AND ASSOCIATED STAKEHOLDERS

Capital and liquidity requirement

As per BASEL III

Minimum Liquidity in foreign currency of each bank (net of external accounts) need to cover 10% of deposits in foreign currency initially to reach 20% in year 3 onwards
In addition, banks need to procure the foreign funds to fund their portion for the release of the 150,000 guaranteed amount over 10 years

Non-complaint banks will be taken over by BDL, to either be merged with other banks or liquidated

Impose by law:

All depositors, shareholders, executive management or board members who have transferred their deposits after October 17, 2019, repatriate the funds as equity in the banks or as deposits to be treated as other local dollars deposits as per the plan

MINIMUM CAPITAL

MINIMUM LIQUIDITY IN FOREIGN CURRENCY

COMPLIANCE

REPATRIATION OF TRANSFERS POST-OCT 2019

Banking Sector requirement

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BANK RESTRUCTURING AND INFLATION MANAGEMENT WILL BE ADDRESSED TO MAXIMIZE GROWTH

Macro-economic implications

BANKING SECTOR STRUCTURING

Even after major adjustments, bank assets to GDP is still among the largest in the world at >250% GDP…
…while private sector debt to GDP is significantly below benchmarks at ~50%
This is explained by a dramatic level of BdL lending
The make up of the Lebanese banking sector complicates liquidity and distracts from core banking business
RIGHT-SIZING OF THE BANK BALANCE SHEETS can reorient banks to funding growth in the productive sectors of the economy
Smaller balance sheets, with less exposure to BdL, reduces risk and offers a fresh start in which capital and liquidity requirements can be met by the strongest players

INFLATION MANAGEMENT

Money supply in lira is expected to grow exponentially increasing narrow money supply significantly
Inflation is a significant risk if money supply grows too quickly and at a faster rate than economic output.
High inflation will counteract all efforts to recover deposits as their real value and the depositors purchase power will decrease
TIMING DEPOSITS, IMPOSING CONTROLS ON CASH, INCREASING RESERVES AND INTEREST RATES are all powerful tools that will play a role

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SHORT AND MEDIUM TERM INFLATION CONTROL…

COORDINATING MONEY SUPPLY WITH FISCAL POLICY IMPLICATIONS

DIGITIZE PAYMENTS END-TO-END, DECREASING CASH CONVERTED TO HARD CURRENCY

Primary surplus can remove a significant part of additional liquidity generated by the ABS products
The Lebanese state will transition from a primary deficit to a primary surplus by 2024
Therefore, delaying LBP ABS payments by 12-18 months can relieve significant inflationary pressures
A 3-4% primary surplus can therefore decrease additional money supply by 10-15%

A significant driver of inflation will be the flight to hard currencies after payment in LBP, especially if exchange rate is not under control
In order to prevent such behaviour and increase tax collection, it is suggested that the money is released primarily in digital form
In order to reduce discrepancy in pricing between LBP Cash and LBP electronic, importers of essential imports and non-luxury products can get access to USD through Sayrafa
Import of luxury purchases will be financed by USD inflow or through existing currency in circulation

Immediate

Short-term

Medium-term

PROPOSED PLAN USD PAYMENT

In addition to LBP payment, the current plan will reimburse cash USD to the low value account.
This cash USD is directed to the lowest value depositors which are more likely to exchange it for LBP for daily consumption needs, which will help neutrilize the LBP payments

Not needed

Delay first ABS payment to 2023

A maximum LBP equivalent of ~300 USD in cash for every owner of an ABS
Importers of essential goods would have access to Sayrafa dollars

ACTION

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…TO LONG TERM INFLATION CONTROL

Medium to Long-term

IMPROVING THE BALANCE OF PAYMENT

Reducing imports and increasing exports will improve the current account position and increase reserves hence helping control inflation
Government will need to implement initiatives to reduce imports (e.g. customs tax rates) and increase exports (e.g. promoting the local manufacturing, etc.)

Government will need to put a comprehensive plan �(to be detailed at a later stage)

ACTION

Long-term

USE INTEREST RATES TO DECREASE SPENDING

Interest rates are currently not effective to control inflation given no confidence in BdL or the Banks
Therefore, interest rate hikes are not useful in the present situation
Over time, as confidence and credibility of the financial sector returns, interest rates can prove to be a powerful tool

Increase interest rates as confidence return to decrease spending

Long-term

USING GOLD TO PROTECT CURRENCY VALUE

As a result of this exercise all USD liabilities at BdL, namely Bank deposits, are backed by USD assets, namely foreign currency
Gold represents the major remaining asset backing the significant increase in LBP liabilities at BdL
As a result, Gold can be an exceptional tool to stabilize the value of the Lira if it can be exchanged for Lira

Liquidate Gold into a “currency board” type of stabilizer for the lira

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RECAP: TREATMENT OF THE DEPOSITORS OVER THE NEXT 15 YEARS

Deposits value

53

PRINCIPAL

35

NEW LOLLAR

16

INTEREST

Treatment

Sub segmentation value

16 BN

35 BN

25 BN

6 BN

22 BN

25% value preservation
75% Nominal value reduction

Repayment mechanism

Paid over 15 years

ABS - Off balance sheet
33% based on USD FX rate at take of payment

Total payment at currency

Over 15 years

LBP 80 TN

Low value (<150K)

Mid value (150-500K)

High value (>500K)

100% value preservation

100% value preservation

USD 12 BN
BAIL-IN

USD 10 BN
Perpetual bonds

ABS - Off balance sheet
33% based on USD FX rate at take of payment

LBP 420 TN

Cash - through banks

USD 25 BN

ABS - Off balance sheet
33% based on USD FX rate at take of payment

LBP 120 TN

Bank shares

Perpetual - Off balance sheet
100% USD back

LBP 75 TN

104

60% value preservation
40% Nominal value reduction

LIRAFY AT 5,000 LBP

LIRAFY AT 12,000 LBP

Sayrafa rate:

20,000LBP/USD

LIRAFY AT 20,000 LBP

ل.ل.

US$

ل.ل.

USD 25 BN - LBP 695 TN

~USD 1.7 BN

per year

~USD 46 TN

per year

KEEP IN USD

-

USD 1.6 BN backing the ABS will be used to invest in the electricity sector and add more return to the security

Non-eligible

Eligible

USD 104 BN

59