A look into government responses to SVB bankruptcy vs. Lebanese banking crisis

Press Highlights
2023-03-14 | 02:56
High views
A look into government responses to SVB bankruptcy vs. Lebanese banking crisis
A look into government responses to SVB bankruptcy vs. Lebanese banking crisis

As word of Silicon Valley Bank's bankruptcy spread, a comparison between the Lebanese government's handling of the country's banking crisis more than three years ago and how one bank in California handled its crisis.

Many countries around the world, including the United States, Europe, China, and India, expressed criticism to implement emergency plans after the bank bankruptcy and to find a way to protect depositors' funds, while Lebanon has yet to come up with a single strategy to deal with its financial crisis even though 54 banks went bankrupt without formally declaring it.

The Lebanese Central Bank keeps wasting depositors' money on unsuccessful policies and even makes more losses, which totaled about $77 billion!
This article was originally published in, translated from Lebanese newspaper Nidaa la-Watan.

What is remarkable, however, is that everyone who helped to undermine the rescue plans since the crisis's outset, specifically in the Finance and Budget Committee in July 2020 to the present, also openly criticizes the successive Lebanese governments' solutions in his capacity as a legislator, which was based, in his opinion and that of several adversaries of a rescue agreement with the IMF on considering the deposits as losses.

Ironically, among those who criticize today are deputies and government officials who, out of loyalty to the Lebanese Central Bank (and its head) and the banks (and their owners), withheld acknowledging the full extent of losses when the crisis first broke out.

They also conspired with those who attempted to overthrow the Lazar plan in 2020, thwarted the Capital Control Law adoption immediately following the banks' closure in late 2019, and obstructed the IMF agreement.

Even though they are represented in government, they continue criticizing it and avoid passing the necessary reform laws.

Therefore, it is essential to consider whether they have the right to draw comparisons with what is occurring in the US to contain the bankruptcy of SVB Bank and the actions they failed to take since the outbreak of the crisis.

What is certain is that the people who have the right to compare and criticize are depositors, for whom the ruling class has only worked to waste their money, carrying the hollow slogan of "deposits are sacred" while diligently deducting from them at rates that exceeded 80% of their actual value.

While the US immediate solution focused on protecting depositors first and granting them the right to dispose of their deposits since yesterday in the SVB and signature bank, which the US Federal Reserve has also seized, without resorting to state assets or treasury revenues, but rather holding the management of the two banks fully responsible.

According to banking expert Dr. Joe Sarouh, the causes of the SVB Bank crisis are entirely distinct from those of the crisis affecting Lebanon's banking industry. 

"First, because the Value of Individual Deposit Guarantee in the US bank reaches 250 thousand dollars, while all individual accounts are less than this amount," he says.

Therefore, paying out compensation to these depositors is not a problem. 

The authorities rushed to address the issues with the companies' accounts and other banks' relationships with SVB Bank because they were the two things that might impact the economy in terms of the decline in the value of shares.

According to Sarouh's explanation to "Nidaa al-Watan," the prompt response and preventative measures were crucial. 

"The US authorities' weekend announcement that they had seized the bank helped to prevent a rush to other banks connected to it," he said.

He cited the US Federal Bank's handling of the bank's bankruptcy, which included opening a direct line of credit for all banks connected to the SVB and giving them the liquidity they needed to meet the needs of their depositors.

To confirm the bank's solvency and the amount of its liquidity, the Federal Reserve started looking into the bank's budget right away.

Additionally, it immediately started the liquidation process and sold the bank's unit in London to HSBC yesterday.
In comparison, Sarouh believed that banking crises are resolved in this way right away rather than after three or four years!

He also pointed out that the SVB Bank's seizure by the US Federal Reserve did not occur out of the blue but rather was the result of careful and close observation of the bank's operations by both the US Federal Reserve and the federal authorities in California, which quickly intervened to preserve the bank's solvency before attempting to sell more of its assets at prices much lower than popular, thereby inciting panic and a rush on the banks connected to it.

"Today, in Lebanon, more than three years after the crisis began, we started discussing the bankruptcy of banks. However, are people aware that bankruptcy principles and laws require the appointment of a temporary manager to assess the assets of banks? and that there is a legal requirement to claim a significant portion of the bank's assets that are suspended between the state and Banque du Liban?" he continued.

The SVB crisis and the crisis affecting Lebanese banks cannot be compared, according to researcher and financial advisor Margarita Chami, because the causes are entirely different.

"Risks associated with SVBs include interest rate risk, concentration risk, a lack of diversification, a concentration of funding sources, and maturity mismatches," she added.

She described how debt bonds with residential, mortgage-backed securities and other long-term maturities make up $90 billion of the bank's assets. 

These bonds are linked to interest rates. As a result, their value decreases if interest rates rise, making up about 77 percent of the bank's total investments in securities and financial bonds.

Startups flocked to withdraw their deposits, but the bank needed help to keep up with demand, forcing it to sell long-term bonds at significantly lower prices.

However, Chami told "Nidaa al-Watan" that the nature of the crisis in Lebanon is different because it is a currency crisis, a balance of payments crisis, a financial deficit crisis, and a crisis involving unsustainable debts.

In addition to the issue of the solvency of the entire banking system and its 70% exposure to sovereign debt (Banque du Liban plus government), in terms of assets whose value significantly declined and resulted in a financial gap that is still accumulating after 3 to 4 years of not resolving the crisis.

Chami also noted that Lebanon's losses are equivalent to five times its GDP, or $14 billion.

Additionally, the losses in the Lebanese banking sector are denominated in dollars rather than the local currency.

The central bank cannot print dollars like the US Federal Reserve would to close the gap and prevent the spread of collapse and bankruptcy to SVB-affiliated businesses and banks.

The paradox, according to Chami, between how the US Federal Reserve handled the crisis and how the Lebanese government handled is that the US Federal Reserve found an immediate solution by excluding shareholders, firing senior management, and protecting all depositors from preventing systemic risks, as opposed to what happened in Lebanon, where the government charged depositors with losses by converting their funds into liras, which had an impact on inflation and all Lebanese depositors and non-depositors at the expense of shareholders and bank owners.

Breaking Headlines

Lebanon News

Press Highlights





The last chance: French envoy's visit and Lebanon's future
Download now the LBCI mobile app
To see the latest news, the latest daily programs in Lebanon and the world
Google Play
App Store
We use
We use cookies to make
your experience on this
website better.
Learn More