Circular No. 567

To Banks, Financial Institutions, and Supervision Commissioners

We deposit herewith Circular No. 13259 dated 26/8/2020 regarding the amendment of:

• The fundamental decision No. 13257 dated 7/11/2017 (Application of International Financial Reporting Standard No. 9 (IFRS 9) attached to Fundamental Circular No. 143).
• The fundamental decision No. 6939 dated 25/3/1998 (Regulatory Framework for Capital Adequacy of Banks Operating in Lebanon, attached to Fundamental Circular No. 44).
• The fundamental decision No. 6938 dated 25/3/1998 (Regulatory Capital for Calculating Prudential Ratios of Banks Operating in Lebanon, attached to Fundamental Circular No. 43).
• The fundamental decision No. 6116 dated 7/3/1996 (Facilities that may be granted by the Central Bank of Lebanon to banks and financial institutions, attached to Fundamental Circular No. 23).
• The fundamental decision No. 7740 dated 21/12/2000 (Liquidation of Real Estates, Shares & Participations Taken to Recover Outstanding or Doubtful Debts in accordance with Article 154 of the Monetary and Bank Law, attached to Fundamental Circular No. 78).

Beirut, 26 August 2020
Governor of the Central Bank of Lebanon
Riad T. Souki

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Circular No. 13259

Amending Fundamental Decisions No. 13257, 6939, 6938, 6116, and 7740

The Governor of the Central Bank of Lebanon,
Pursuant to the Monetary and Bank Law, specifically Articles 70, 174, and 175 thereof; Pursuant to Fundamental Decision No. 13257 dated 7/11/2017 and its amendments regarding the application of International Financial Reporting Standard No. 9 (IFRS 9); Pursuant to Fundamental Decision No. 6939 dated 25/3/1998 and its amendments regarding the Regulatory Framework for Capital Adequacy of Banks Operating in Lebanon; Pursuant to Fundamental Decision No. 6938 dated 25/3/1998 and its amendment regarding Regulatory Capital for Calculating Prudential Ratios of Banks Operating in Lebanon; Pursuant to Fundamental Decision No. 6116 dated 7/3/1996 and its amendment regarding Facilities granted by the Central Bank of Lebanon to banks and financial institutions; Pursuant to Fundamental Decision No. 7740 dated 21/12/2000 and its amendment regarding the Liquidation of Real Estates, Shares & Participations Taken to Recover Outstanding or Doubtful Debts in accordance with Article 154 of the Monetary and Bank Law; And relying on the paper issued by the Basel Committee in April 2020 regarding procedures that may be adopted, which reflects the impact of the global pandemic (COVID-19); In the public interest under current exceptional circumstances; And to support economic growth, particularly by adopting flexible and exceptional measures against temporary constraints on banks to enhance their capacity to lend to economic and productive sectors; And based on the decision of the Central Bank's Board taken in its meeting held on 25/8/2020;

It is decided as follows:

Article 1

The text of the last paragraph of "Article Six" of Fundamental Decision No. 13257 dated 7/11/2017 is repealed and replaced with the following text:

« Banks and financial institutions are required, exceptionally, to apply as a minimum the following methodology for forming provisions against their sovereign exposures:
1- Using the expected credit loss ratios calculated systematically per Annex No. (6) attached to Fundamental Decision No. 6939 dated 25/3/1998 on portfolios held at the Central Bank of Lebanon in Lebanese Lira and foreign currency (including certificates of deposit), and on exposures to Treasury bonds issued by the Lebanese State in Lebanese Lira or foreign currency — for forming provisions in the Profit or Loss Statement, regarding the aforementioned portfolios.
The Central Bank's Board shall periodically review the imposed ratios based on current developments.
2- The aforementioned provisions shall be formed gradually over a period of five years. The Central Bank's Board may approve extending this deadline to 10 years upon the concerned bank completing its mandatory increase in Core Capital as specified in Article Six bis of Fundamental Decision No. 6939 dated 25/3/1998.
3- Disclosure in the financial statements prepared for publication under Fundamental Decision No. 6574 dated 24/4/1997 regarding the total provisions to be gradually formed and the timeframe for doing so. »

Article 2

"Article Seven bis" is added to Fundamental Decision No. 13257 dated 7/11/2017 with the following text:

« Article Seven bis: Without prejudice to the provisions of the "Second" paragraph of this article, banks and financial institutions operating in Lebanon shall not downgrade the classification of debts of customers negatively affected by the spread of the coronavirus (hereinafter "The New Situation"), in case of delays in payment (principal and/or interest) and/or exceeding approved facilities granted to them, provided that this is not considered a significant indicator of increased credit risk or a downgrade in credit value for such customers, nor evidence of default as of 1/2/2020 and up to 31/12/2020.
In this case, banks may reschedule unpaid due bonds resulting solely from this situation without triggering debt reclassification.
Second: In exceptional circumstances, and if the impact of "The New Situation" is highly negative on a customer's credit capacity to the point of completely stopping operations and ceasing to be a going concern, banks and financial institutions operating in Lebanon shall immediately downgrade the classification of the concerned customer's debt to Stage 3 (3 Stage).
Third: Banks and financial institutions operating in Lebanon shall continue applying the adopted methodology according to regulatory texts issued by the Central Bank of Lebanon for classifying customers not negatively affected by "The New Situation".
Fourth: Banks and financial institutions shall monitor the future financial status of customers, with evaluation to be completed by 31/12/2020.
Expected credit loss provisions shall be calculated based on classifications determined solely by this assessment after the aforementioned date, in accordance with the "Second" paragraph of this article, and recorded fully in the Profit or Loss Statement for the year 2020. »

Article 3

The text of "Article Six bis" of Fundamental Decision No. 6939 dated 25/3/1998 is repealed and replaced with the following text:

« Lebanese banks are required to:
1- Not distribute dividends on Common Equity Tier 1 (CET1) rights for the financial years 2019 and 2020.
2- Increase their Core Capital, within a maximum period of 31/12/2020, by 20% of Common Equity Tier 1 (CET1) rights as of 31/12/2018, through new instruments of any type from capital instruments in foreign currency that can be accepted within the various Core Capital categories specified in this decision, excluding retained earnings and revaluation profit from real estate assets.
Without prejudice to Fundamental Decision No. 7462 dated 23/11/1999 regarding the system for real estate exposures and participations, the Central Bank's Board may exceptionally approve that 50% of the aforementioned 20% ratio for the concerned bank be formed by shareholders transferring real estate to the concerned bank, provided it is liquidated within a period not exceeding five years from the date of Central Bank approval.
The increase in Core Capital previously implemented under Circular No. 13129 dated 4/11/2019 shall count toward the aforementioned 20% ratio in Item (2) of this article. »

Article 4

The text of "Article Eight" of Fundamental Decision No. 6939 dated 25/3/1998 is repealed and replaced with the following text:

« The full revaluation profit from real estate assets (land and buildings) wholly owned by the bank, and real estate assets wholly owned by real estate companies in which the bank participates (excluding fixed assets taken to recover debts per Article 154 of the Monetary and Bank Law, subject to the following conditions), shall be accepted within Core Capital:
1- The Central Bank's Board must verify, at the expense of the concerned bank, the validity of the revaluation process and approve it.
2- The revaluation process must be completed by a maximum date of 31/12/2021. »

Article 5

The text of "Article Ten" of Fundamental Decision No. 6939 dated 25/3/1998 is repealed and replaced with the following text:

« 1- Banks must apply minimum capital ratios in addition to the "CET1 Conservation Buffer" (Buffer Conservation Capital) attached herein, as specified in Annex No. 5.
2- Any bank is prohibited from distributing dividends if any of its capital ratios fall below:

• 7% at the Common Equity Tier 1 (CET1) level.
• 10% at the Core Capital level.
• 12% at the Total Capital level.
  3- The "CET1 Conservation Buffer" is among the accepted elements within the Common Equity Tier 1 category, amounting to 2.5% of risk-weighted assets.
  4- If the "CET1 Conservation Buffer" falls below the ratio specified in Item (3) of this article at any time, banks must replenish the shortfall from elements accepted within the Common Equity Tier 1 category to reach the aforementioned ratio.
  5- Without prejudice to Item (4) of this article and exceptionally, the "CET1 Conservation Buffer" ratio may fall below the required ratio (i.e., 2.5%), with this shortfall being gradually formed over two years 2020 and 2021, to be considered as of the year 2022 and at a rate not less than 0.75% annually, reaching the aforementioned 2.5% ratio by the end of 2024. »

Article 6

The text of "Article Eleven" of Fundamental Decision No. 6939 dated 25/3/1998 is repealed and replaced with the following text:

« Each bank must establish a comprehensive plan to comply with capital requirements and regulations imposed by the Central Bank of Lebanon, and submit it to the Governor. The plan must include at least the following conditions:

• A: Reflecting the bank's strategy.
• B: Specifying the period required for compliance with ratios and standards set by the Central Bank.
• C: Considering provisions required by the Supervision Committee and/or supervision commissioners within their periodic duties.
• D: Considering potential provisions and losses estimated by the bank resulting from exposure to all types of risks. »

Article 7

"Article Twelve bis" is added to Fundamental Decision No. 6939 dated 25/3/1998 with the following text:

« Article Twelve bis: Without prejudice to the provisions of "Article Twelve" above, banks may adopt the following exceptional measures:
1- For the two years 2020 and 2021, 100% of the value of formed provisions (i.e., provisions already formed and those to be formed) on financial assets within the balance sheet and productive off-balance sheet liabilities that have not significantly increased in credit risk (Stage 1) and those with significant increase (Stage 2) are added to Core Capital - Common Equity Tier 1 category.
These provisions include those formed on the portfolio of exposures at the Central Bank in Lebanese Lira and foreign currency, and provisions formed on portfolios held at the Central Bank in Lebanese Lira and foreign currency including certificates of deposit.
2- From the year 2022 until the end of 2024, the proportion of provisions added to Core Capital - Common Equity Tier 1 is gradually reduced according to Item (1) above, as follows:

• In the year 2022: 75% of the value of added provisions, maximum.
• In the year 2023: 50% of the value of added provisions, maximum.
• In the year 2024: 25% of the value of added provisions.
  3- The application of "Article Eleven bis" is suspended until the end of 2024.
  Second: Disclosure within annual reports prepared by banks regarding the adoption of measures mentioned in the "First" paragraph of this article and their impact on capital ratios. »

Article 8

The text of Annexes No. (1), (3), and (6) attached to Fundamental Decision No. 6939 dated 25/3/1998 is repealed and replaced with the new text attached to this decision.

Article 9

The text of the first paragraph of Item (9) of "Article Two" of Fundamental Decision No. 6938 dated 25/3/1998 is repealed and replaced with the following text:

« Differences resulting from revaluation of real estate assets or any other fixed assets accepted within Common Equity Tier 1, excluding assets taken to recover debts per Article 154 of the Monetary and Bank Law. »

Article 10

The text of Item (4) of "Article Three" of Fundamental Decision No. 6938 dated 25/3/1998 is repealed.

Article 11

The text of Items (8) and (9) of "Article Three" of Fundamental Decision No. 6938 dated 25/3/1998 is repealed and replaced with the following:

« 8- The shortfall in the real estate and participations liquidation reserve to be formed against it.
9- The shortfall in the special reserve to be formed against doubtful and poor debts not settled according to Fundamental Decision No. 7694 dated 18/10/2000. »

Article 12

The "Ninth" paragraph of "Article Fourteen bis" of Fundamental Decision No. 6116 dated 7/3/1996 is added with the following text:

« 3- For exceptional loans granted as a Supporting Factor (Factor Supporting) under this article until 30/6/2020, a risk weight equal to 0.1 is added to capital requirements related to these loans according to Fundamental Decision No. 9794 dated 14/12/2007 regarding the distribution of main credit portfolios. The actual risk weight (Effective Risk-Weight) is determined for the aforementioned loans as: Effective Risk Weight = Base Risk Weight x 0.1. »

Article 13

The text of "Article Eight" of Fundamental Decision No. 7740 dated 21/12/2000 is repealed and replaced with the following text:

« Banks are prohibited from distributing total profits from the sale of real estates and participations taken to recover debts. Profits resulting from this sale are automatically transferred to the "Undistributable General Reserve" item, including reserves for real estates and participations taken to recover debts released as a result of this process. »

Article 14

The provisions of all Articles Four, Five, Six, and Seven of this decision shall apply from financial statements dated 30/6/2020.

Article 15

This decision shall be effective upon its issuance.

Article 16

This decision shall be published in the Official Gazette.

Beirut, 26 August 2020
Governor of the Central Bank of Lebanon
Riad T. Souki

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Annex No. 1: Common Equity Tier 1 (CET1)

CET1 consists of the following elements:

1. Nominal value of ordinary shares and other capital instruments meeting CET1 acceptance criteria.
2. Capital reserves.
3. Profits from ordinary shares and other capital instruments meeting CET1 acceptance criteria, and merger instruments.
4. Cash advances allocated to capital that do not bear interest.
5. Capital allocated to real estate exposures mentioned in Article Seven of this decision.
6. Legal and regulatory reserves, and other reserves including liquidation real estate reserve and special reserve for doubtful/poor debts not settled per Fundamental Decision No. 7694 dated 18/10/2000.
7. Retained prior results, current financial year profit/loss, and expense/income accounts.
8. Reserves related to Other Comprehensive Income (OCI) elements, including:
   • Differences from revaluation of real estate/other fixed assets accepted in CET1 (excluding debt-recovery real estates per Art. 154).
   • Net unrealized profits/losses on financial instruments classified as Fair Value Through OCI.
   • Cumulative foreign currency translation adjustments.
   • Cash flow hedge reserves.
   • Own credit risk reserves.
   • Other OCI-related reserves.
9. Minority interest accepted within CET1.
10. "Regulatory Adjustments" including:
    a) Deductions: Current year profit (if positive), expense/income account (if positive), gross unrealized profits on FV-OCI instruments, cumulative positive foreign currency translation adjustments, positive/negative cash flow hedge reserves, positive/negative own credit risk reserves, other positive OCI reserves, shortfall in liquidation real estate/participations reserve, shortfall in special reserve for doubtful/poor debts per Circular 7694, repurchased ordinary shares/bonds with Core Capital characteristics (direct/indirect), Goodwill and other intangible fixed assets, required provisions shortfall on financial assets (negative difference between available provision balance and systematic expected losses) and productive/non-productive off-balance sheet liabilities.* Exceeding Articles 152 or 153 of the Monetary and Bank Law (whichever is greater). Total participations (ordinary shares + related cash advances/capital instruments) in banks, financial institutions, and insurance companies, deductible from CET1 ("Reciprocal Cross Holdings"). b) Additions: Provisions formed on financial assets within the balance sheet and productive off-balance sheet liabilities not significantly affected by credit risk (Stage 1), except provisions on portfolios in Lebanese Treasury bonds and Central Bank portfolios including certificates of deposit, per Article Twelve bis.

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Annex No. 3: Total Capital

Total Capital consists of the following elements:

• Core Capital as specified in Annex No. (2) attached to this decision.
• Additional Capital (Capital 2 Tier), consisting of:
  • Nominal value of preference shares and other capital instruments meeting Additional Capital criteria.
  • Issuance profits from preference shares and other capital instruments meeting Additional Capital criteria.
  • Subordinated loans and subordinated bond issuance proceeds meeting Additional Capital criteria.
  • Minority interest accepted within Additional Capital.
  • "Regulatory Adjustments" including:
    1. Additions: 50% of cumulative positive foreign currency translation adjustments; 50% of gross unrealized profits on FV-OCI instruments; "General Provisions" per Article Twelve; Provisions formed against expected credit losses on financial assets within the balance sheet and productive off-balance sheet liabilities not significantly affected by credit risk (Stage 1) and accepted within Additional Capital.*
    2. Deductions: Amount consumed from subordinated loans/bonds; Amount consumed from preference shares/capital instruments with fixed terms; Total participations, subordinated loans, subordinated bonds, and other capital instruments in banks/financial institutions/insurance companies meeting Additional Capital criteria and deductible from it ("Reciprocal Cross Holdings").
       Note: *This item is suspended until the end of 2024 per Article Twelve bis.

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Annex No. 6: Table of Ratios Applied for Systematic Expected Losses Calculation

Exposures	Applied Ratios
Exposures at the Central Bank of Lebanon in Lebanese Lira (including certificates of deposit)	0%
Exposures at the Central Bank of Lebanon in foreign currency (maturity < 1 year)	1.89%
Exposures at the Central Bank of Lebanon in foreign currency (including certificates of deposit) (maturity > 1 year)	1.89%
Exposures at foreign central banks in local currency	0%
Exposures at foreign central banks in foreign currency (in BBB or above rated countries)	0.03%
Exposures at foreign central banks in foreign currency (in below BBB and unrated countries)	0.72%
Exposures in Lebanese Treasury bonds in Lebanese Lira	0%
Exposures in Lebanese Treasury bonds in foreign currency	45%
Exposures in foreign government bonds in local currency	0%
Exposures in foreign government bonds in foreign currency (in BBB or above rated countries)	0.03%
Exposures in foreign government bonds in foreign currency (in below BBB and unrated countries)	0.72%
Exposures at resident banks (including issued debt securities)	1.89%
Exposures at non-resident banks (including issued debt securities) (BBB or above rated)	0.15%
Exposures at non-resident banks (including issued debt securities) (below BBB and unrated)	0.72%
Portfolio of loans to public sector institutions (treated as sovereign exposures) in Lebanon in Lebanese Lira	0%
Portfolio of loans to public sector institutions (treated as sovereign exposures) in Lebanon in foreign currency	45%
Portfolio of loans to public sector institutions (treated as sovereign exposures) in foreign countries in local currency	0%
Portfolio of loans to public sector institutions (treated as sovereign exposures) in foreign countries in foreign currency (BBB or above)	0.03%
Portfolio of loans to public sector institutions (treated as sovereign exposures) in foreign countries in foreign currency (below BBB and unrated)	0.72%
Portfolio of loans to public sector institutions (treated as corporate loans)	- Resident: 45% <br> - Non-resident: 0.72%
Portfolio of corporate loans (including issued debt securities)	- Resident: 9.45% <br> - Non-resident: 0.72%
Portfolio of SME loans (including issued debt securities)	- Resident: 3% <br> - Non-resident: 0.6%
Portfolio of retail loans	- Resident: 1.75% <br> - Non-resident: 0.35%
Portfolio of residential loans	- Resident: 1.75% <br> - Non-resident: 0.35%
Portfolio of loans secured by commercial real estate	- Resident: 3.6% <br> - Non-resident: 0.72%
Other assets subject to IFRS Standard	0.72%

Note: Includes exposures and loans where applicable, plus off-balance sheet financial liabilities after applying appropriate Credit Conversion Factors.