Cyprus Lebanese banks between a rock and a hard place

By George Eid and Andrew Rosenbaum

Lebanese banks in Cyprus, like all Lebanese banks, are facing intense pressure from the Lebanon central bank (Banque du Liban) to raise capital. At the same time, most Lebanese banks are owed large sums by the country’s government.

As a result, the Central Bank of Cyprus (CBC) has asked branches of Lebanese banks here in Cyprus to guarantee deposits to 100 per cent. Given that the total sum of deposits in Cyprus branches of Lebanese banks is about €200 million – a fraction of the total of near €100 billion in deposits in Cyprus banks – there is little danger for systemic consequences for the Cyprus banking system.

Total deposits in all Lebanese banks declined by $31 billion since early 2019, the largest drop in their history.

Some Lebanese banks “still have the muscles” to maintain their presence on the island and elsewhere, one banker explains.  “It is a case-by-case situation when it comes to Lebanese banks.”

It’s not the first time this has happened. Back in March, after Lebanon defaulted on its public debt, the CBC asked the nine Lebanese bank branches in Cyprus to increase deposit guarantees. Given the upheaval in Lebanon at present, and the demand by the Banque du Liban for a major increase in reserve capital at all banks in the country, it is not by any means a surprising demand, banking industry experts say.

The real pressure on Lebanese banks comes from the Banque du Liban which is demanding that all Lebanese banks increase their capital by 20 per cent and to have 3 per cent in foreign currency reserves outside the country as a further guarantee, explains Lebanese Economist Nassib Ghobril. Banks that are unable to raise capital by 20 percent, risk having to exit the market.

On top of that, Lebanese banks have built up extensive lending to the Lebanese government which may never be repaid.

“Banks are holding $10 billion in Government Eurobonds and $75 billion in dollar deposits at Banque du Liban,” explains Marwan Barakat, chief economist at Lebanese Bank Audi (which has no branch in Cyprus).  If the government could redeem its engagements to banks, the banks’ liquidity would be reinforced and the banks would be able to honour fully their own dollar engagements.”

For now, Lebanese banks are trying to meet the demands of their own central bank.

“The Bank owners had a meeting at the Banque du Liban with the governor Riad Salame 10 days ago to discuss the CBC demands and if anything can be done on the Lebanese side to ease the CBL requirements. But the meeting was not conclusive” a banker told the Cyprus Mail.

Some Lebanese banks are selling off foreign subsidiaries in order to raise capital. Lebanon’s Blom Bank is reportedly close to a deal with Bahrain’s Bank ABC to sell its ownership in Blom Bank Egypt, Blom Bank said in a statement on Wednesday.

In previous years, Lebanese banks expanded throughout the Levant, and even further. Many had offices in Frankfurt, for example, and some even opened networks in Australia.

Ghobril points out that Lebanese banks have always considered the Cypriot market a good opportunity.

“Many Lebanese companies and individuals moved to Cyprus during the Lebanese civil war and after it. This continues today. So it was the choice of the Lebanese banks to open branches on the island to cater for these clients” the banking source explains.

But today, with their home country ungovernable and in economic crisis, these banks are forced to rethink that strategy.