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Key Prudential Practices
Key Prudential Rules applied by the Lebanese Banking Sector

• Minimum capital of operating banks in Lebanon

- LBP 10 billion for the head office of a commercial bank and LBP 500 million for each additional branch.
- LBP 30 billion for an investment/specialized bank .
- LBP 150 billion for an Islamic bank.

• Regulatory framework for capital adequacy

- In compliance with Basel II and III Accords for the calculation of credit risks, operational risks and market risks.

- For the calculation of the solvency ratios, the banks adopt the Basel III criteria as follows:
The common equity Tier 1 ratio on weighted assets should reach 10% at the end of 2018, (9% at the end of 2017).
- The Tier one Capital ratio should reach 13% at the end of 2018, (12% at the end of 2017).
- Total Capital ratio (Tier I and Tier II) should reach 15% at the end of 2018, (14.5% at the end of 2017).
- These ratios include the "Capital Conservation Buffer " that must reach 4.5% at the end of 2018.

- Banks should also establish a documented mechanism for the assessment of capital adequacy that is consistent with: The nature and size of the bank, the degree of diversification and sophistication of its operations and services, the type and the degree of risk involved, and its future prospects.
The implementation of the capital adequacy assessment also requires in addition of capital requirements to cover Pillar I risks (ie credit risk, operational risk and market risk), identification and monitoring of other risks including interest rate risks in the bank's portfolio, credit concentration risks, liquidity risks and reputational risks.

• Ceiling of facilities granted to a single borrower / or to one or more foreign countries

- The ceiling on facilities granted to a single borrower or a related group of borrowers, is 20% for facilities used in Lebanon and abroad, whether on the basis of the bank group's own funds or on those of the bank with its branches in Lebanon and abroad.

- This ceiling is 10% for facilities used only abroad, and this, on the basis of the bank's own funds with branches in Lebanon and abroad.

- The ceiling on facilities used in any country with a sovereign rating equal to or greater than BBB is set at 50% of the bank's own funds with its branches in Lebanon and abroad, and for facilities used in any sovereign-rated country less than BBB at 25% of these funds.

- The sum of facilities used in all foreign countries should not exceed 400% of the bank's own funds with its branches in Lebanon and abroad, and for countries with a sovereign rating below BBB, 100% of these funds.

- The sum of large loans (credit greater than 10% of the banking group's own funds), used in Lebanon and abroad, should not exceed 4 times the value of these funds.

- The sum of claims granted by any related entity or branch abroad in a currency other than that of the host country must not exceed 60% of their foreign currency deposits.

• Lending to related parties

- The net total of credits granted to related parties in accordance with paragraph 4 of Article 152 of the Code of Money and Credit shall not exceed 2% of the bank's own funds, of which 1% for credits for those granted without meeting the conditions stipulated in the above paragraph.

Related parties include: major shareholders, board members, bank executives in Lebanon and affiliated institutions in Lebanon and abroad, and their family members.

- Related parties may not benefit, directly or indirectly, from facilities or loans from banks and financial institutions affiliated abroad.

• Liquidity ratios

- Banks (with the exception of medium and long-term credit banks) have to hold at the BDL as required reserves on Lebanese pound accounts, the sum of 25% of their demand liabilities in LBP and 15% of their term liabilities in LBP. These reserves pay zero interest but many deductions are allowed under a number of special lending schemes to some productive sectors and activities.

- Banks are required not to exceed 25% of all LL customer deposits as net claims to the LL private sector.

- Banks are required to keep 10% of their foreign currency liabilities (all types of deposits, certificates of deposit, bank certificates, debt securities and financial sector loans with maturities of one year or less) as net liquid assets, and 15 % of these liabilities as mandatory deposits with the Central Bank receiving the same interest rates as the latter remunerate foreign currency term accounts.

- Banks must maintain a liquidity ratio greater than 100% in Lebanese Pounds and in each main currency, reflecting their assessment of liquidity risk and in accordance with the characteristics of the liquidity risks to which they may be exposed. This ratio is calculated using the following formula: High quality liquid assets / total net cash outflows over a 30-day period.

- Banks are required to keep at least 40% of their Tier one capital denominated in Lebanese pounds as liquid assets.
• Foreign exchange positions

- Banks are authorized to maintain a net, short or long trading position that shall not exceed, at any time, 1% of total net Tier 1 capital, provided that their global position does not exceed, at the same time, 40% of their total net Tier 1 capital. The global position takes the sum of either total long or total short positions of all foreign currency accounts, whichever bigger.

- Banks are authorized to maintain a fixed long positions whose countervalue in Lebanese pound shall not exceed 60% of Tier 1 capital. These positions are one of the elements of the foreign exchange structural positions of the bank.

• Classification of loans and constitution of provisions and reserves

Rules are in conformity with Basel Committee guidelines for banking supervision, and with IFRS International Financial Reporting Standards.

1- Classification of loans and their risks

Banks are required to simultaneously adopt two systems for the classification of the risks of their loans and make the mapping between these two systems.

- Banks must classify their loans, for control and supervision purposes, in five categories for retail loans classified according to the number of days late and for all other loans except retails in six categories: Standard, watch, watch and regularize, substandard, Doubtful, bad.
In addition, banks must establish their own Loan Grading System, consisting of 10 categories, 7 for performing loans and 3 for non-performing loans.

- Interest on non-performing loans (NPLs) will be recorded as “unrealized interest” and the provisions to be set up should be partial for doubtful debts, and in full for bad debts.

- In accordance with Basel II, banks distribute all loans and advances between the following six main portfolios: retail loans, SMEs, Corporate, public sector, housing, loans secured by commercial real estate.

2- The constitution of provisions and reserves

- Provisioning is regulated by the monetary authorities and the constitution and release of provisions are subject to the control of the Banking Control Commission (CCB). Provisions for Doubtful and bad loans agreed by the CCB are tax deductible.

- Banks started since 2016, in application of the requirements of the IFRS9 standard which comes into effect at the beginning of the year 2018, to constitute provisions (general, collective and specific) in return for the losses of the credit risks on their portfolio of balance sheet financial assets and off-balance sheet financial commitments, of all performing and non-performing categories. These provisions are in the same currency as the financial assets.

- Among these provisions, is the collective provision of 2% of risk-weighted assets of all debt portfolios, and this provision does not fall into any category of capital.
Also shown is the general provision, which the bank must establish for future risks on assets that have not shown signs of depreciation, and this provision enters the Tier II capital, up to 1.25% of the risk-weighted assets.
While the deficiencies or negative balance of provisions on expected risks are deductible from Tier I common equity.

- The banks have transferred to the non-distributable general reserves account, all the reserves constituted up to 2017, such as the reserve for undetermined banking risks, the general reserve constituted in exchange for all performing loans, including those of “retail loans”.
These reserves are part of core capital Tier I.

- Banks must retain 10% of their profits annually as a legal reserve, before the distribution of dividends.

• International Banking Standards

Banks in Lebanon comply with all international banking standards.

1 - Fundamental principles of the Basel Committee

- Banks must establish internal audit and control units in accordance with the principles issued by the Basel Committee.

- Banks must establish an internal audit committee whose role is to review internal audit and control systems and assist the board of directors in its supervision role. They must also establish a risk committee whose role is to supervise the application of the risk management rules in the bank in accordance with the regulations established by the monetary authorities and the supervisory authorities..

- Banks must apply banking governance standards in accordance with the principles issued by the Basel Committee.

2. International standards for combating money laundering, terrorist financing and law enforcement

- Banks comply with FATF Financial Action Task Force standards and recommendations on the fight against money laundering and terrorist financing.

- Banks develop policies, and take preventive measures to prevent and counter criminal acts electronically, especially those of a financial nature.

- Banks have to create a "compliance department" that consists of:
A "legal compliance unit" that monitors and prevents legal risks by verifying that the Bank complies with laws and regulations.
A "verification unit" that verifies compliance with applicable anti-money laundering and anti-terrorist financing procedures, laws and regulations.

- The Legal Compliance Unit also takes appropriate measures to comply with the provisions of the General Data Protection Regulation (GDPR) issued by the European Parliament and the Council of the European Union.

3- Laws aimed at combating tax evasion and cooperation between countries in this area

- Banks enforce US tax law requirements against FATCA tax evasion.

- Banks also apply the OECD Common Reporting Standard for the automatic exchange of information for tax purposes.

- And in accordance with the international recommendations of the World Forum and the Organization for Economic Cooperation and Development (OECD) on the common reporting standard, banks take the appropriate administrative and technical measures to provide to the Special Investigation Commission (SIC) ) tax information requested by foreign authorities on the accounts of residents of their country regarding tax information covered by bank secrecy, and the Ministry of Finance for the automatic exchange of information. They also establish, document and identify the financial accounts to be reported.

4- Financial Stability Criteria

- Banks must prepare a recovery plan to restore the stability of their financial situation, which must be adapted to the size of the bank and the degree of complexity of its activities and operations. This “recovery plan” must comply with the key parameters of effective resolution regimes for financial institutions adopted by the FSB Financial Stability Board.

- Banks establish a business continuity plan, which is a set of procedures, agreements and contact details that can be used to ensure business continuity in the event of a severe crisis, disaster or event that may prevent them from operating normally.

5- International Financial Reporting Standards (IFRS)

- Banks comply with international accounting standards (IAS) and international best practices for financial disclosure.

- Banks comply with IFRS. Beginning in 2018, banks will apply IFRS 9 regarding the classification of financial assets, and the constitution of numerous provisions required. They will establish the business models required in accordance with the requirements of this standard for the management of financial assets and the securing of cash flows.

Last Updated on March 06, 2019
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