A Risk Strategist’s Perspective on BDL’s Intermediate Circular 547
As a Risk Strategist, I dare to write that the recent BDL Intermediate Circular 547 does not qualify to be called an “economic stimulus’ in case it was intended to be so! In fact, it is an utter failure for a number of reasons! As I try to convince you of what I claim, I remain hopeful that, in retrospect, developing events will prove me wrong!
It should come as no surprise to anyone that banks in Lebanon, like everywhere else, are lenders to individuals, corporations, and to the government (banks invest in government securities). As individuals, corporations, and more so than or, the government slack (or completely default) on repayment of their obligations due to the economic fallout caused by the COVID19 pandemic, banks’ profitability and capital levels will not only decrease substantially, but for some banks it will deplete completely. In fact, there are legitimate questions about [some] banks’ ability to survive in the aftermath of this multifaceted crisis!
The unemployment tsunami has started long before COVID19. Daily news feeds from various sources confirm our worst fears. Unemployment is only the tip of the economic devastation iceberg. There is so much we still don’t know, and it shall, for sure, surface since we all are forced to stay home (self-quarantine) longer. Some expect this impasse to last till way into May 2020 and later. The truth is that it’s been much more than just unemployment; it’s been a severe under-utilization of economic resources with dire consequences which are developing daily:
· Many individuals are willing and able to work, and are employed but they have not been productive!
· Most households have money and are willing and able to spend it, but there is little they can spend it on when they are confined to the walls of their homes!
· Most firms have the capacity to produce but with their mounting worries over the well being of their workforce, they have asked some staff to stay home idle, and others to work remotely (less efficiently) from home!
On top of all that, our government is crippled even before coronavirus landed an unwelcomed guest on our homeland! Rightfully so, our government has been overwhelmed trying to identify “patient 0”, and track his/her infection to learn how and where it all started to suppress the spread of the virus. Little does the government know when, or how it will all end! We’ve been asked, and somehow forced, to socially decompose, and to decentralize to be safe and stay safe! This much needed social redistribution comes with high economic cost which is yet to be effectively identified, assessed and fully realized.
At a time when Chief Risk Officers, and bank executives should be busy making proper and accurate assessments of their risks, all risks, as COVID19 continues to develop, and its ripple economic effects continue to stubbornly and exponentially rise, the Central Bank of Lebanon presented banks with a “teaser”. Yes, a teaser whose purpose is “to bail out the un-bailed clients”! Here is how it goes:
if you (the client) are currently benefiting from a loan and/or has done so in the past, and demonstratively unable (i.e., potentially, you are a bad credit risk) to:
1. Make your payments on your loans (i.e., your loan must have been downgraded, and provision for credit losses set aside),
2. Pay your wages and salaries (i.e., a sign of deteriorating credit risk circumstances), and/or
3. Cover your operating expenses (i.e., a sign of significant deterioration in credit risk circumstances),
. . . as if banks don’t have enough of those!
The generosity of the circular continues, … We (banks) are ready to bail you out (as intermediate BDL Circular 547 postulates) even if what you need is beyond your capacity to borrow as long as you (the client) can demonstrate that you need the liquidity to cover any (or a combination) of the above three (could be more) qualifying criteria.
I fear this could potentially develop into a huge opportunity for favoritism and corruption as has occurred in some of the housing and incentive loans. Have we secured the restoration of ethics in lending before we hand over such schemes to some of the corrupt senior managers and executives of banks?! This is a legitimate concern because:
a) The burden of proof (proof that the client has a legitimate need for liquidity) is on the bank. It leaves the floor open for possible collaboration between the client and corrupt members of the banking institution to fabricate, provide and document false financials. It has been a common practice by banks to accept two sets of financial from their clients, and BDL is well aware of such a practice.
b) The new facilities are given at the bank’s own risk. This means should the client goes bankrupt, which is very likely in these bad economic times, the resulting losses must be borne by the bank. As a result, the circular obstructs the proper and fair pricing of the facility since it imposes zero interest rate and no commissions and charges.
c) The bank is forbidden to charge the client any fees, and, if client qualifies, this extraordinary facility must be at zero interest rate. With that, BDL left me with an uneasy impression that “time is not money” considering the amount of resources which must be dedicated to process these loans!
In addition, mistakes in processing these extraordinary loans have not been duly defined although they are costly!
· The nature of small & medium enterprises in Lebanon makes the probability that the client (i) is not able to maintain legible financials, and/or (ii) he/she is only capable of submitting unaudited financials very likely. Where does this leave the bank and its burden of proving legitimacy of the request?!
· How the mistakes committed in processing existing loans (and there have been plenty) be interpreted in assessing the legitimacy of these newly instituted extraordinary facilities should the mistake of the present be an extension of the mistakes of the past?!
· To be able to assess a firm’s need to cover operating expenses requires the bank to be intimately familiar with the client’s production processes and supply chain. How possible is that considering that the bank can’t charge for the additional efforts?!
· A firm’s proven inability to pay wages and salaries assumes that all staff on the firm’s payroll are legal and reported to the tax authorities since the proof exists only in official documents. Is this the reality of things here in Lebanon?!
And the list of no-answered questions is long…!
In setting the timeline for benefiting and implementing the Circular, BDL seems to have gone out on a limb! March (expired), April, and May of 2020 are unreasonably optimistic considering the all-out curfew, the rightfully so self-imposed quarantine, and the alarmingly reduced banks’ (and other firms’) working hours.
The Circular assigns the responsibility of securing strict compliance to the Banking Control Commission (BCC) whose stay (president and members) has expired on March 25th, 2020, and if the political impasse continues, we will not have these vacant seats (appointments) filled any time soon! Then, who runs the show at BCC? Despite all of the aforementioned concerns, compliance failure shall cost the bank:
1. A penalty of 15% of the size of the non-compliant extraordinary loans, and
2. Twice the volume of these loans will be held in non-interest bearing reserves at BDL for the duration of the repayment of these loans.
Finally, the Circular allows banks to extend these extraordinary loans in the currency of their choice, but they (banks) can replenish this liquidity through non-interest bearing loans from BDL but only in US Dollars where the equivalent value of loans in Lebanese Lira are priced at the official average spot exchange rate registered on the day of BDL’s approval, and for a period of five years.
Lebanese can expect little from the fiscal authorities in terms of economic stimulus since the government itself is in need for bailing out. Thus came the push on the monetary authority to act fast. However, this intermediate BDL Circular 547 is not the “cure” nor it is the “pain killer” for Lebanon’s economic ills! In fact, it may serve as a disruptor! Moreover, and in this context, I dare to warn Chief Risk Officers not to heave a sigh of relief in response to this circular. Your job remains to identify, assess and mitigate all risks irrespective of what may come out in the form of regulatory reliefs (including the recent modified implementation timeline of the revised Basel 3, which is commonly referred to as Basel 4). With nearly all nations now in the grip of the deadly virus, all hands are on deck until we deal with COVID19 and the crisis around it. Therefore, Lebanon will have to act swiftly and rely on its available tangible and non-tangible resources!