Lebanese banks’ branches operating in Cyprus will shut down following a decision by the country’s Central Bank. A Central Bank of Cyprus (CBC) official has confirmed to CNA the decision taken by the bankrupt country’s banking regulator.
Sources familiar with the matter, told CNA the Central Bank of Cyprus (CBC) has taken measures with a view to mitigating the impact to the Cyprus Deposit Guarantee Scheme (DGS) and to safeguard the depositors who placed money with the branches of the Lebanese banks, believed to be facing one of the top three worst recessions in the past 150 years, according to the World Bank.
The CBC started monitoring closely the situation in the neighbouring country since 2019 when financial challenges became much more severe. In March 2020 Lebanon defaulted on its foreign debt payments.
According to the same sources, the CBC as a first precautionary measure curtailed the inflow of deposits in the Lebanese branches in Cyprus. A total of nine branches were operating in Cyprus of which two already notified of their closure. The limit to deposits was aiming to protect the Cyprus banking system and the Cyprus DGS which would be triggered in case the branches could not pay the guaranteed deposits below €100,000.
In March 2020, the CBC also decided to instruct the branches to transfer to the Cypriot Central Bank equivalent liquidity to cover their guaranteed deposits. The move aimed to ensure the Lebanese branches, in case of problems, would have the reserves to pay the guaranteed deposits and consequently the risk would not weigh on the Cyprus DGS and consequently the island’s banking system.
According to financial accounts, the Lebanese banks were transferring deposits booked as “due to headquarters”, that is, owed by their banking groups in Lebanon. The same sources explained that as the banks in the neighbouring country are facing mounting problems, there was a great risk these liabilities would not be paid by their parent banks.
According to the same sources, these moves resulted in deposits held with the Lebanese branches declining to around €400 million in end-2020 from €650 million in the end of 2019.
In March 2021, the CBC also instructed the Lebanese branches to transfer in Cyprus additional liquidity amounting to 50% of the deposits over €100,000, in a move believed to further protect depositors.
Furthermore, in July 2021 the CBC promoted the amendment of the law on Deposits Guarantee Scheme and the resolution of credit and other institutions, enabling the regulator to take control of reserves to pay the guaranteed depositors in case of solvency problems to any banking institution licensed in Cyprus.
These moves, the same sources told CNA, aimed to ring-fence the Cyprus banking system from the problems in the neighbouring country. In case the DGS was triggered to pay guaranteed deposits held with the Lebanese branches, the Central Bank of Cyprus would be forced to replenish the DGS liquid funds by requesting additional contributions from the Cypriot banks, with the Cypriot lenders facing challenges in profitability. The Cyprus DGS must maintain liquidity amounting to 0.8% of the banking system insured deposits.
Furthermore, the same sources told CNΑ a potential failure of Lebanon’s banking system would have no impact to Cyprus’ banking system, as the Lebanese branches' loans and deposits concerned non-resident clients.
According to the latest available data, the Lebanese branches’ deposits and loans amounted to approximately 1% of total deposits and loans in the Cyprus banking system.