The Law on the Reform and Re-Organization of Banks in Lebanon was published on August 21, 2025 in the Official Gazette. Parliament had passed this long-awaited legislation on July 31, 2025 under heavy international pressure, and after rushed committee deliberations and confusion surrounding the voting process in parliament.

While the final version introduces necessary amendments, it still suffers from significant shortfalls. The Higher Banking Commission, which will oversee the bank restructuring process, has a composition that creates risks of political capture and conflicts of interest; it is granted appropriately significant powers, but in some cases excessively discretionary; and transparency safeguards are insufficient.

OVERVIEW

The law aims to update Lebanon’s legal framework related to mechanisms for restructuring and/or liquidating banks. As for the allocation of losses and the compensation of depositors, the law remains pending the enactment of the « Financial Regularization and Deposit Recovery Law » (i.e. the Gap Law), which is expected to provide a clear framework in that regard.

The legistlation establishes a bicameral Higher Banking Commission (HBC). Based on a proposal from the BDL Governor, the law stipulates the establishment of a rarely adopted two-chamber HBC, instead of the single format proposed in the government’s draft. The first chamber is tasked with issuing punitive decisions against non-compliant financial institutions. The second chamber is responsible for decisions on the restructuring and/or liquidation of banks, and will thus play the central role in the restructuring process.

The second chamber consists of 8 members:

1.      BDL Governor

2.      BDL First Vice-Governor

3.      A Vice Governor selected by BDL’s Central Council

4.      An Independent financial expert (appointed by Cabinet upon Finance Minister’s proposal)

5.      An economic expert (appointed by Cabinet upon Economy Minister’s proposal, based on a shortlist by the Association of Economic Bodies)

6.      A judge (appointed by Cabinet upon Justice Minister’s proposal, based on a shortlist by the Higher Judicial Council)

7.      Director-General of the Ministry of Finance

8.      A member of the National Institute for the Guarantee of Deposits (NIGD) (not representing commercial banks)

KEY OBSERVATIONS

I.                    The HBC composition gives room for political capture and conflict of interest

-          Power Sharing: The entity's composition is influenced by a sectarian and political power sharing approach rather than by institutional considerations.

-          Central Bank’s Stronghold: Half of the members are from BDL’s Central Council, which risks to compromise independence in decision making.

-          Affiliations to Commercial Banks : Two members of the HBC might have direct affiliations with commercial banks, raising serious concerns over potential conflicts of interest. These include the NIGD, whose board is controlled by a majority of banks, and the Association of Economic Bodies — which will shortlist an HBC member — and of which the Association of Banks is a member.

II.                  The law is dependent on the upcoming Gap Law

The current law’s dependence on the upcoming Gap Law exposes it to potential legal challenges, as it could be subject to invalidation. Additionally, article 14, which sets out the principles governing the bank restructuring process, together with Annex 1, lays out a clear hierarchy of loss allocation in line with international standards. The article however remains suspended until the Gap Law is enacted.

III.                The law’s Objectives not clearly aligned to international standards

Article 3, which sets out the objectives of the law, is only partially aligned with international standards, unlike the draft submitted by the Council of Ministers.

On the positive side, the objectives clearly highlight the importance of ensuring financial stability, protecting deposits, and limiting the use of public resources in the restructuring process.

However, the article omits the need to preserve the continuity of banks’ core functions — a gap that risks prolonging the life of zombie banks during restructuring, undermining the provision of essential banking services, disrupting transactions for individuals and businesses, and constraining liquidity.

 IV.               Transparency safeguards are lacking

Article 8 requires the HBC to publish only summaries of its decisions. Publication of key details about assessment results and the reform or resolution tools used, is left to the HBC discretion limiting public insight into its actions.

 V.                 The HRC has appropriately significant powers, but in some cases excessively discretionary

 While many powers in Article 16 are necessary for effective bank resolution, the article grants the HBC an unusually high degree of control not fully aligned with international standards on transparency and predictability.

For example, the HBC may choose not to treat creditors within the same class equally if it “deems it necessary” for sector stability or overall creditor benefit, whereas international practice restricts such exceptions and requires strict justification and review.

The Commission also has the power to recover preferential, undervalued, or fraudulent transactions that depleted bank assets. Though this aligns with international best practices, the absence of a formal framework—including clear criteria and time limits—allows for open-ended discretion that hinders accountability and exposes the process to selective or inconsistent application.