Rebuilding Trust: A Structural Reset for Lebanon’s Banking Sector

Executive Summary

Lebanon’s banking collapse stands among the most severe financial failures in modern history, destroying public confidence, freezing deposits, and paralyzing productive activity. Incremental reforms cannot fix such a systemic breakdown. Only a bold, structural redesign can protect depositors, revive growth, and restore trust. This framework proposes a segmented, transparent architecture built on four interlocking pillars:

• Narrow banks to safeguard deposits and drive a cashless transition;
• Investment banks to rebuild productive infrastructure;
• Cooperative banks to anchor local resilience;
• Overseas banking vehicles to reconnect Lebanon’s global networks with its recovery.

A robust, structured deposit recovery strategy sits at the heart of this plan, prioritizing fairness, enforceability, and international supervision. Risk-governance matrices with clear early-warning triggers will ensure that each segment operates transparently and sustainably. Together, these pillars could offer Lebanon a potential credible path to recover from a decade of financial ruin and deliver dignified, fair outcomes to depositors and all concerned parties.

Introduction

Lebanon’s financial meltdown was not a tragedy of chance or the result of misfortune, but the predictable outcome of a rigged system sustained by structural decay and elite consensus. It was the foreseeable consequence of a political and economic system that systematically recycled deposits to finance sovereign deficits, all under a veil of weak regulation and financial engineering. By turning depositors into involuntary lenders to the state, the banking sector exposed itself as an instrument of expropriation, not a guardian of public trust. The result was a systemic collapse, leaving behind over $70 billion in accumulated losses, widespread deposit inaccessibility, and an economy denied the institutional credit mechanisms necessary for real-sector development.

Rebuilding Lebanon’s banking system cannot mean restoring the same structure that failed. It demands a redesigned, segmented architecture in which functions are clearly separated, deposits are ring-fenced from sovereign exposure, and financial intermediation supports the productive, social, and developmental needs of the nation. This framework aims to transform banking from a tool of elite enrichment into a genuine backbone for inclusive economic recovery and development.

Pillar 1: Narrow Banking — Deposit Safety and Cashless Transition

Narrow banks will protect deposits by fully backing them with high-quality, liquid assets placed directly at the central bank or in short-term, investment-grade foreign securities. By law, they will be banned from holding sovereign debt, blocking the possibility of using deposits to finance fiscal deficits. These institutions will guarantee depositor access to funds and anchor a reliable payments system, serving as the foundation for Lebanon’s transition to a modern, digital, cashless economy. All public salaries, social benefits, and tax revenues will flow through these fully secure accounts, while partnerships with fintech and telecom companies will accelerate the adoption of electronic payments and reduce informality.

In addition to protecting deposits, narrow banks will play a crucial role in Lebanon’s transition away from an oversized cash economy that has historically fueled informality, tax evasion, and money laundering. By mandating that public-sector salaries, social transfers, and tax payments flow through secured digital accounts, narrow banks will sharply limit opportunities for illicit cash-based transactions.

Collaboration with technology providers will expand mobile wallets and digital onboarding, while robust KYC (know-your-customer) and AML (anti-money laundering) safeguards will be built into these digital channels to align Lebanon with international best practices against financial crime. As more citizens integrate into trackable payment systems, the country will regain credibility, curb the shadow economy, and unlock a more sustainable tax base. This strategy is inseparable from the mission of narrow banks to safeguard deposits and modernize Lebanon’s financial ecosystem.

Their regulatory risk framework will be rigorous. Narrow banks will maintain a liquidity coverage ratio of no less than 100%, with breaches triggering mandatory recapitalization or payout restrictions. A leverage ratio capped at 1:1 between deposits and reserves will limit exposure. Any sovereign debt exposure will immediately trigger forced divestment and penalties. Non-performing loans on any equity-funded activities must remain below 3% of bank equity. The share of electronic transactions should reach at least 60% of all payments within three years. Reserve buffers in periods of stress must stay above 95%, and any critical cybersecurity breaches will trigger immediate audits and mandatory upgrades.

Key Risk Indicator	Trigger Threshold	Supervisory Response
Liquidity Coverage Ratio	≥ 100%	Mandatory recapitalization or payout restriction
Leverage Ratio	≤ 1:1 deposits vs. reserves	Freeze new deposits, immediate supervisory audit
Sovereign Debt Exposure	0%	Forced divestment, financial penalties
Non-Performing Loans (equity-funded)	≤ 3% of equity-funded credit	Suspend lending, increase loss provisions
Digital Payment Adoption	≥ 60% within 3 years	Enforce mandates, expand e-payment systems
Reserve Buffer	≥ 95% during stress	Additional buffer requirements
Cybersecurity Breach	Zero tolerance	Emergency audit and upgrades

Pillar 2: Investment Banking — Financing Reconstruction and Productive Growth

Investment banks will become the financial engine of Lebanon’s reconstruction. Their mission will prioritize channeling capital into infrastructure renewal, energy transition, agriculture, industrial upgrades, and public health — strictly avoiding speculative consumer or real estate bubbles. These institutions will operate under a new Independent Investment Banking Authority, bound by quarterly reporting, external audits, and strong corporate governance rules.

Funding will come from a blend of diaspora investments, asset recovery proceeds, and concessional finance from donors and international partners. Investment banks will also provide trade finance for strategic imports, denominated in stable foreign currencies, with minimum collateralization of 120% and a maximum exposure of 5% of bank equity per sector. Trade finance should mature within 180 days to avoid rollover risks. Fuel import credits, in particular, will be awarded through transparent syndicates, with external auditing to protect reserves.

Their risk supervision will be explicit. Capital adequacy ratios must stay at or above 25 percent, with automatic recapitalization or resolution if they fall below. Non-performing loans cannot exceed 7%-10% percent of their equity-funded book, or lending restrictions and restructuring will follow. Collateral for trade finance dropping under 120 percent or portfolio concentrations exceeding 20 percent of bank equity will trigger rebalancing. Shadow banking linkages over two percent of GDP will require an emergency licensing review. Governance instability, defined as more than two board resignations per year, will prompt external oversight.

Key Risk Indicator	Trigger Threshold	Supervisory Response
Capital Adequacy Ratio	≥ 25%	Recapitalize or resolution procedures
Non-Performing Loan Ratio	≤ 10%	Stress tests, restrict new lending
Trade Finance Collateral Ratio	≥ 120%	Freeze approvals, strengthen requirements
Fuel Import Exposure	≤ 5% of equity	Diversify, require audit
Portfolio Concentration	≤ 20%	Rebalancing plan
Shadow Banking Linkages	≤ 2% of GDP	Emergency licensing review
Governance Stability	≤ 2 board exits/year	Supervisory appointee

Pillar 3: Cooperative and Community Banking — Anchoring Local Resilience

Cooperative and community banks will return trust and participation to local communities. Their member-owned, democratically governed structures will focus on affordable small-scale lending, savings, and micro-credit products for farmers, small businesses, and informal workers. Surpluses will be reinvested in community needs such as renewable energy, agricultural infrastructure, and local clinics. These cooperatives will also partner with investment banks on joint community development projects to maximize local benefit.

A risk framework will ensure their stability and resilience. Liquidity ratios cannot drop below 80%, or additional reserves will be required. Loan concentration in any single sector must remain under 40% of their portfolio, with active diversification strategies. Default rates must stay below 5%, with any breach triggering on-site reviews and support. Participation among eligible members should remain above 60% to ensure local accountability, while credible reports of fraud or mismanagement will demand immediate independent investigations.

Key Risk Indicator	Trigger Threshold	Supervisory Response
Member Participation Rate	≥ 60%	Community outreach, governance review
Sector Loan Concentration	≤ 40%	Portfolio diversification
Default Rate	≤ 5%	On-site review, support
Liquidity Ratio	≥ 80%	Additional reserves, monitoring
Fraud Reports	Zero tolerance	Investigation, protection

Pillar 4: Overseas Banking Vehicles — Trust and Global Engagement

Lebanon’s diaspora is a crucial resource for recovery, yet their confidence was shattered. A dedicated diaspora banking pillar will reconnect expatriate Lebanese with the country’s revival through secure diaspora bonds, professionally managed equity funds, and ring-fenced deposits in narrow banks. Diaspora representatives will sit on oversight boards to build trust and transparency.

The risk framework will maintain resilience. Diaspora subscription levels must stay at or above 75 percent of targeted inflows, with guarantees and proactive communications strengthened if needed. Sovereign exposure will remain permanently banned through legal segregation. Diaspora bond yields will remain within 2% of global benchmarks to stay competitive. Audit failures will be disclosed and corrected immediately, while reputational crises such as lawsuits will trigger crisis communications and external reviews. Digital onboarding rejection rates will remain below ten percent to guarantee inclusivity.

Key Risk Indicator	Trigger Threshold	Supervisory Response
Diaspora Subscription	≥ 75%	Enhance guarantees, communication
Audit Failures	Zero tolerance	Investigation, disclosure
Sovereign Risk	0%	Segregation, guarantees
Bond Return	±2% global benchmarks	Review managers, pricing
Reputation Events	No unmanaged events	Crisis comms, review
Onboarding Failure Rate	≤ 10%	Strengthen KYC, upgrades

Implementation Roadmap

This ambitious restructuring requires a carefully sequenced approach. The Lebanese Parliament should first pass clear segmentation and banking resolution laws to define mandates, shield narrow banks, and empower regulators. Independent forensic audits must follow to allocate legacy losses transparently and fairly. Narrow banks should be prioritized to restore public trust and guarantee payment systems, followed by investment banking facilities supported through multilateral partnerships. Cooperative banking modernization and diaspora banking solutions would then unfold in parallel, drawing on international partners for guarantees and oversight.

Transparent and consistent public communications will be essential to build confidence in the plan and explain both timelines and progress. International support—particularly from the IMF, the World Bank, and the Lebanese diaspora—should be conditioned on meeting reform benchmarks, ensuring the process stays credible and politically protected.

Deposit Recovery Framework

Restoring frozen deposits is the core test of Lebanon’s financial rescue, yet the most difficult to achieve. Losses are so deep that no policy can promise a full recovery. Instead, this plan suggests protection for small depositors, provides a phased recovery pathway for medium depositors, and links large-scale restitution to real asset recovery efforts — all under strict international supervision.

Lebanon Deposit Recovery Tiers and Mechanisms

Depositor Tier	Deposit Range	Recovery Mechanism	Timeline	Currency Treatment	Depositor Options	Key Safeguards
Small Depositors	Under $50,000	Full cash payout via narrow banks funded by BDL gold and FX reserves	12–24 months	100% LBP liquidity at transparent market rates, with priority FX coverage where possible	Cash withdrawal or secure digital account	IMF-monitored schedule; Loss Recognition Law guarantees priority; zero sovereign risk
Medium Depositors	$50,000–$500,000	Partial cash + Sovereign Asset-Backed Certificates + optional diaspora infrastructure bonds	3–7 years	Partial LBP conversion at a pre-negotiated rate (~50%), certificates indexed to inflation	Option to swap to diaspora bonds with premium yields	Certificates tied to state revenue streams; quarterly audits; sovereign segregation; public dashboard
Large Depositors	Over $500,000	Haircuts (40–80%) + swaps into Asset Recovery Fund equity or Development Bank reconstruction projects	3–5 years	LBP conversion on cash portion at negotiated rates; recovery instruments in hard currency where feasible	Convert to shares in recovered assets or co-investments	Forensic audits; priority on legitimate savings; international oversight of recovery processes
All Tiers	All	Enforced legal hierarchy: shareholders bear losses first, then large depositors	Immediate	Tiered conversion prioritizing small deposits in FX first	Full legal protection under new banking legislation	Loss Recognition Law; IMF/World Bank supervision; transparent public dashboard to track repayment progress

Lebanon cannot afford illusions of full restoration but can deliver fairness, transparency, and enforceable ways for depositors to recover their savings, transforming them from victims to partners in rebuilding the nation.

Conclusion: From Collapse to National Renewal

Lebanon’s banking collapse is a generational disaster—rooted in sovereign entanglement, political capture, and systemic misgovernance. A return to the old model is not an option. Only a segmented, transparent, and internationally supervised banking architecture can rebuild trust and deliver equitable recovery.

This new framework rests on four functional pillars:

• Narrow banks to safeguard deposits and drive a cashless transition;
• Investment banks to rebuild productive infrastructure;
• Cooperative banks to anchor local resilience;
• Overseas banking vehicles to reconnect Lebanon’s global networks with its recovery.

At its core lies a fair and enforceable deposit recovery strategy, backed by strong risk oversight and early-warning systems. With deep international partnerships and credible governance, this model offers Lebanon a path from collapse to renewal—anchored in justice, resilience, and shared prosperity.