The International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) of Lebanon in 2000, and in 2001 conducted an update of the FSAP. The IMF in a 2000 report notes that the FSAP assessed banking supervision in Lebanon. However, this report has not been published on the IMF website. According to the 2007 U.S. Department of Commerce Country Commercial Guide, the banking system in Lebanon is sound, with a high capital adequacy ratio, and a transparent regulatory framework in line with international standards. The U.S. Department of State (DoS), in its 2007 International Narcotics Control Strategy Report, indicates that Lebanon has adopted the Basel Core Principles (BCPs) and is "compliant" with 24 of the 25 BCPs. Furthermore, as noted in a 2005 report by the Institut de la Mediterranee & Economic Research Forum, the Banking Control Commission (BCC), which was formed as an independent body within the Central Bank of Lebanon (CBL) and acts as the supervisory authority in Lebanon, has issued a number of regulations in line with the BCPs. The BCC performed a self-assessment on October 31, 2006, and has set up a committee, together with the CBL, to ensure compliance with Basel II recommendations by January 1, 2008. Nonetheless, there is little information publicly available apart from these statements in the 2007 U.S. DoS report regarding BCP compliance.

General Overview

According to a 2007 U.S. Department of State (DoS) International Narcotics Control Strategy Report. Lebanon has adopted the 25 Basel Core Principles (BCPs) and is "compliant" with 24 of them. The pending BCP, which is on legal protection for supervisors, is currently being addressed. Furthermore, as noted in a 2005 report by the Institut de la Mediterranee & Economic Research Forum (IM & ERF), the Banking Control Commission (BCC), which acts as the supervisory authority in Lebanon, has issued a number of regulations in line with the BCPs. However, there is little further information publicly available to substantiate the statement from the U.S. DoS 2007 report regarding Lebanon's compliance with the BCPs. The International Monetary Fund (IMF) did conduct a Financial Sector Assessment Program (FSAP) of Lebanon in 2000, and in 2001 conducted an FSAP update, according to the Oesterreichische Nationalbank (OeNB) in a 2005 report. The IMF's 2000 report further notes that the FSAP included an assessment of banking supervision in Lebanon, but this report has not yet been published on the IMF website.

As stated in a 2007 U.S. Department of Commerce (DoC) Country Commercial Guide, the banking system is sound, with a high capital adequacy ratio, and the regulatory framework is "transparent and consistent with international norms" (p. 78). Furthermore, rules for loan classification and provisioning conform to the BCPs, and banks are required to adopt internal control policies and procedures in accordance with BCPs, as noted on the Association of Banks in Lebanon (ABL) website. However, the IMF's 2007 Article IV Consultation Concluding Statement on Lebanon, discloses that new banking activities in the domestic and foreign markets will require a revision of the supervisory framework to mitigate risks. Furthermore, consolidation will be necessary in the medium term to enhance the responsibility of shareholders and the accountability of bank management. The BCC performed a self-assessment on October 31, 2006, and has set up a committee, together with the Central Bank of Lebanon (CBL), to ensure compliance with Basel II recommendations by January 1, 2008, according to the 2007 U.S. DoS report. However, there is little information publicly available apart from this statement by the 2007 U.S. DoS report regarding this self-assessment.

The main laws governing the banking sector in Lebanon include the 1942 Code of Commerce, the 1956 Banking Secrecy Law, and the 1963 Code of Money and Credit. As stated in the 2007 U.S. DoS report, the government of Lebanon is in the process of approving a draft law on legal protection of bank supervisors. According to its website, the CBL is an autonomous authority which regulates and grants licenses to all banks and financial institutions, and is responsible for safeguarding the soundness of the banking sector. According to a 2003 Bank for International Settlements (BIS) report on payment systems in Lebanon, the BCC was formed as an independent body within the CBL in May 1967 to supervise banks and financial institutions. On the other hand, the Higher Banking Commission (HBC), also established in 1967 under the CBL, acts as the judicial authority, and imposes administrative penalties on financial companies, as well as on auditors of these companies. Per the same report, the HBC, BCC, and CBL cooperate with each other to "ensure the stability and soundness of the financial and monetary sector" (p. 8). An Association Agreement between the European Union (EU) and Lebanon was adopted in 2002, and entered into force on April 1, 2006 to promote the development of Lebanon.

The 2007 U.S. DoC report adds that, as of September 2006, the banking sector in Lebanon was comprised of 54 commercial banks and 9 investment banks, with total assets of the five largest commercial banks amounting to US$46.1 billion, or 62.7% of total banking assets. Furthermore, provisions against non-performing loans were maintained at more than two-thirds.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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There is little information publicly available addressing Lebanon's compliance with this Principle. The CBL is an autonomous authority which regulates and grants licenses to all banks and financial institutions, as noted on its website, and is responsible for safeguarding the soundness of the banking sector. According to a 2003 BIS report on payment systems in Lebanon, the BCC was formed as an independent body within the CBL in May 1967 to supervise banks and financial institutions. On the other hand, the HBC, also established in 1967 under the CBL, acts as the judicial authority, and imposes administrative penalties on financial companies, as well as auditors of these companies. Per the same report, the HBC, BCC, and CBL cooperate with each other to "ensure the stability and soundness of the financial and monetary sector" (p. 8).

1.(2) Operational independence and adequate resources.

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According to the CBL website, the BCC performs its supervisory functions as an independent body with a separate budget, and coordinates its operations with the CBL to ensure that banks and financial institutions are implementing monetary and financial regulations. The BCC also has access to all information available to the CBL regarding the financial structure and administrative status of all institutions of the banking sector. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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There is little information publicly available addressing Lebanon's compliance with this Principle. As stated in a 2007 U.S. DoC's Country Commercial Guide report, the regulatory framework in Lebanon is "transparent and consistent with international norms" (p. 78).

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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There is little information publicly available addressing Lebanon's compliance with this Principle. According to its website, the CBL is responsible for safeguarding the soundness of the banking sector.

1.(5) Legal protection for supervisors.

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According to a 2007 U.S. DoS report, the government of Lebanon is in the process of approving a draft law that will ensure the legal protection of bank supervisors. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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According to a 2003 BIS report on Payment Systems in Lebanon, the HBC, BCC, and CBL cooperate with each other to "ensure the stability and soundness of the financial and monetary sector" (p. 8). Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

4. Authority to review and reject transfer of ownership.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

5. Authority to review major acquisitions and investments.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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According to the 2007 U.S. DoC Country Commercial Guide, the banking sector in Lebanon is compliant with the Basel I Capital Accord, and the BCC and CBL have set up a committee to ensure compliance with Basel II recommendations by January 1, 2008. Furthermore, the report notes that the banking system in Lebanon is sound, with capital adequacy ratios of about 22%. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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As stated on the Association of Banks in Lebanon (ABL) website, rules for loan classification and provisioning are in conformity with the Basel Committee on Banking Supervision. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

9. Prudential limits and management information system on concentration of exposure.

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The maximum amount of shareholders' equity that banks can lend to an entity is 20%, as noted on the ABL website. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

10. Arm's length rule and monitoring for connected lending.

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As stated on the ABL website, lending to related parties needs to be secured, and cannot exceed 25% of shareholders' equity. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

11. Policies and procedures for country risk and transfer risk.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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According to a 2004 IMF report on Interim Staff Visit to Lebanon, the BCC, in coordination with the CBL, has taken a "proactive stance in monitoring and mitigating risks in the banking sector" (p. 15) by issuing new regulations. The BCC has also been upgrading its financial risk monitoring capacity. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

13. Comprehensive risk management processes.

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There is little information publicly available addressing Lebanon's compliance with this Principle. According to the Article IV Consultation Concluding Statement published by the IMF in 2007, new banking activities in the domestic and foreign markets will require a revision of the supervisory framework to mitigate risks. Furthermore, as noted in the 2004 IMF Report on Interim Staff Visit in Lebanon, the BCC and the CBL have taken a "proactive stance in monitoring and mitigating risks in the banking sector" (p. 15) by issuing new regulations. The BCC has also been upgrading its financial risk monitoring capacity.

14. Adequate internal controls.

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As stated on the ABL website, banks are required to adopt internal control policies and procedures in accordance with the Basel Committee on Banking Supervision. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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According to the 2007 U.S. DoS report, a new Law on Fighting Money Laundering was implemented in April 2001 to criminalize money laundering. In 2002, following the enactment of the Anti-Money Laundering (AML) Law, Lebanon was removed from the Financial Action Task Force (FATF). Non-Cooperative Countries and Territories list. With respect to the Bank Secrecy Law, which could be used as a means to conduct illegal operations, the ABL set a Due Diligence Convention which was signed by the member banks, and issued new due diligence measures for banks to prevent money laundering operations, as stated on the CBL website. The DoS report adds that although Lebanon has improved its AML and combating the financing of terrorism (CFT) framework, it still lacks effective prosecutions and convictions. Nonetheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

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According to the CBL website, the BCC conducts both on-site and off-site supervision to identify and address problems in the banking sector. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

17. Regular contact with bank management and understanding of bank's operations.

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As stated on the CBL website, the BCC holds regular meetings with banks' management. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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According to a 2003 World Bank ROSC on Accounting and Auditing, banks are required to prepare consolidated financial statements and regulatory reports in accordance with the reporting requirements set by the BCC. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

20. Ability to supervise on a consolidated basis.

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As stated in a 2007 IMF Article IV Consultation report, consolidation will be necessary in the medium term in the banking sector to enhance the responsibility of shareholders, and accountability of banks' management. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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There is little information publicly available addressing Lebanon's compliance with this Principle. According to the ABL website, accounting standards in Lebanon are in conformity with international standards.

22. Adequate supervisory measures to ensure timely corrective action.

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As stated on the CBL website, the BCC can impose corrective and reform measures on individual banking institutions when deemed necessary. Nevertheless, there is little information publicly available addressing Lebanon's compliance with this Principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

24. International exchange of information with other supervisors.

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There is little information publicly available addressing Lebanon's compliance with this Principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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There is little information publicly available addressing Lebanon's compliance with this Principle.