Dealing with Non-Resident Sectors

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355 Old No. 1719 | Text/Section/Decision No. 62 | Date: 31/12/2014

Basic Circular for Banks No. 62 Also addressed to Financial Institutions and Supervisors

We submit to you the Basic Decision No. 7274 dated 15/04/1999 concerning Dealing with Non-Resident Sectors.

Beirut, 15 April 1999 Governor of Bank of Lebanon: Riad Tawfiq Salamah

1. Title amended per Article 1 of Intermediate Decision No. 8784 dated 14/07/2004 (Intermediate Circular No. 61).

356

Basic Decision No. 7274

1. Dealing with Non-Resident Sectors

The Governor of Bank of Lebanon, based on the Monetary and Discount Law, particularly Articles 70, 76, 77, 79, and 81 (paragraph 6), and Article 174 thereof, based on the Central Council decision taken in its session held on 14/04/1999,

Decides as follows:

Article One: First, banks and financial institutions resident in Lebanon are prohibited, each regarding its own affairs,

• 1. Receiving deposits (including credit deposits) and granting loans, opening current accounts and credit accounts in Lebanese Lira for the non-resident financial sector (banks, financial institutions, exchange offices, financial intermediation institutions, and foreign or Lebanese insurance companies located abroad).
• 2. Accepting or financing any type of debts previously established abroad in any currency, except: a. Sovereign debt bonds issued by the G10 countries group.

2. Last amendment per Article 1 of Intermediate Decision No. 10470 dated 09/07/2010 (Intermediate Circular No. 224).

357 Text/Section/Decision No. 62 | Date: 31/12/2014 b. Debt bonds rated "BBB" and above issued by entities with an equivalent rating, provided their total nominal value does not exceed 50% of the own funds of the concerned banks or financial institutions, and provided that this percentage is reduced by an amount equivalent to the total nominal values of operations conducted on the financial instruments mentioned in items (3) and (4), and foreign deposits for a period of one year or more mentioned in item (5) below, from the "First" paragraph of this Article. If these bonds are guaranteed, the guarantor must be rated "BBB" and above. The concerned banks and financial institutions may obtain prior approval from the Central Council of Bank of Lebanon to exceed the aforementioned 50% ratio. The Central Council conditions its approval on: - The concerned bank or financial institution holding a high solvency ratio. - Compliance by the concerned bank or financial institution with sound management principles and regulatory circulars issued by Bank of Lebanon, particularly those related to sound management and Basic Decision No. 9286 dated 09/03/2006 concerning the academic, technical, and literary qualifications required for practicing certain tasks in the banking and financial sectors, and Banking Control Committee circulars. c. Sovereign debt bonds issued by the host country in its local currency, invested by Lebanese banks and financial institutions' units in these countries (branches, banks, and affiliated financial institutions), provided the volume of these investments does not exceed the value of deposits held by those units in local currency.

• 3. Conducting proprietary operations with non-resident financial sectors on financial instruments, in any currency, except those specified in the conditions of item (4) or those that: a. Have an unconditional guarantee for the full value of capital.

358 b. The issuer or guarantor is rated "A" and above. c. Their total nominal value does not exceed 25% of the own funds of the concerned banks or financial institutions.

• 4. Conducting proprietary operations with non-resident financial sectors on financial instruments linked to treasury bonds issued by the Lebanese government or certificates of deposit issued by Bank of Lebanon in foreign currency ("Notes Linked Credit"), except those whose conditions include: a. Unconditional guarantee for the full value of capital, at least in case of a "credit event" (Event Credit), particularly non-payment of the aforementioned treasury bonds and certificates of deposit. b. Rating of "A" and above for the issuer or guarantor. c. Mandatory repayment of the aforementioned treasury bonds and certificates of deposit in kind by transferring them to the client upon a "credit event", particularly non-payment. d. Changes in prices of credit default swaps (CDS) on Lebanese government bonds not being considered a credit event requiring the issuer to repay treasury bonds in kind by transferring them to the client, unless an internationally recognized credit event occurs. The total nominal value of these instruments must not exceed 10% of the own funds of the concerned banks or financial institutions, except after obtaining Central Council approval.
• 5. Investing more than 10% of their own funds as foreign deposits for a period of one year or more.

358 bis 1 Text/Section/Decision No. 62 | Date: 31/12/2014

• 6. Conducting treasury placements abroad (Placements Treasury) other than operating accounts (Accounts Operating), except:
  • Correspondents rated "BBB" and above.
  • Unrated correspondents belonging to banking groups rated "BBB" and above, provided these correspondents are located in countries rated "BBB" and above. Placements with Lebanese banks' foreign subsidiaries are exempt from the above paragraph, subject to Article 1 of Basic Decision No. 7156 dated 10/11/1998 concerning deposits, placements, and loans of Lebanese banks in foreign banks and affiliated or associated institutions. In all cases, the total "net credit exposure" (Exposure Credit Net) to a single foreign correspondent, calculated based on Lebanon and abroad branches, must not exceed 25% of the own funds of the bank or financial institution, calculated based on Lebanon and abroad branches. "Net credit exposure" (Exposure Credit Net) to a single correspondent means:
  • All types of cash placements with the correspondent, including current and operating accounts (Accounts Operating).
  • Accounts provided as collateral for facilities (Collateral Cash).
  • Investments in all financial instruments issued by the correspondent.
  • Any other direct or indirect operations leading to the bank or financial institution bearing the correspondent's risk. Accounts that can be netted according to contracts signed between the bank and the correspondent are excluded from credit exposure calculations.

1. Added per Article 8 of Intermediate Decision No. 10987 dated 30/04/2012 (Intermediate Circular No. 299), then amended per Article 1 of Intermediate Decision No. 11110 dated 21/07/2012 (Intermediate Circular No. 302).
2. Amended at the beginning of this item per Intermediate Decision No. 11619 dated 29/11/2013 (Intermediate Circular No. 347).

358 bis 2 The Central Council of Bank of Lebanon may, on a case-by-case basis and for reasoned considerations, exempt one correspondent from the provisions of this item. Second, to apply the rules stipulated in the "First" paragraph of this Article, the following ratios and bases are adopted:

• 1. The total operations conducted with a single issuer, mentioned in item (b) of paragraph (2) and in paragraph (3) of the "First" paragraph above, must not exceed 10% of the own funds of the concerned banks or financial institutions.
• 2. Rating by Standard & Poor's (S&P) or equivalent by other internationally known rating agencies (Agencies Rating), with the lowest credit rating among ratings issued by these companies being adopted.
• 3. Rating grades are as of the execution date of operations; if this rating declines, the concerned banks and financial institutions must liquidate the relevant positions or notify the Banking Control Committee, which may either mandate their liquidation within a specified time limit or assess the viability of continuing to hold them, with the possibility of requesting special provisions on a case-by-case basis.
• 4. For calculating the ratios mentioned in paragraph (b) of item (2), paragraph (c) of item (3), and items (4) and (5) of the "First" paragraph, investments of all subsidiaries of banks and financial institutions abroad are included in the numerator (Bust) for debt bonds, financial instruments, linked notes issued by the Lebanese government or certificates of deposit issued by Bank of Lebanon in foreign currency (Notes Linked Credit), and foreign deposits for one year or more, and the consolidated net tier I capital (Consolidated Net Tier I Capital) in the denominator (Maqam).

358 bis 3 Text/Section/Decision No. 62 | Date: 31/12/2014

• 5. When placing bids (Bid), banks and financial institutions must not exceed the 50% ratio mentioned in paragraph (b) of item (2) from the "First" paragraph above, and the 10% ratio mentioned in item (1) of the "Second" paragraph.
• 6. The total operations mentioned in paragraph (b) of item (2), and items (3), (4), and (5) of the "First" paragraph, must not exceed 50% of the own funds of the concerned banks or financial institutions.

Third, banks and financial institutions resident in Lebanon are prohibited from allowing a foreign correspondent or deposit holder to dispose of or lend Lebanese government treasury bonds, Bank of Lebanon certificates, or those linked (Notes Linked Credit) deposited with them or provided as collateral for financing operations (including repurchase agreements - Agreement Repo), provided that contracts concluded with the foreign correspondent or deposit holder explicitly contain this provision.

Article Two: The prohibition mentioned in Article One of this decision does not cover guarantees issued by the non-resident financial sector as security for loans granted in Lebanese Lira for confirmed employment or commercial needs in Lebanon. The value of checks collected in Lebanese Lira for the non-resident financial sector, which are converted to foreign currency within 72 hours.

Article Three: Resident banks may subscribe to Lebanese treasury bonds on behalf of the non-resident financial sector under the following conditions:

• 1. The source of funds must be foreign currency deposits converted to Lebanese Lira specifically for this purpose.
• 2. Notify the Financial Operations Directorate of Bank of Lebanon with the names of non-resident financial institutions intending to subscribe, and obtain prior approval from Bank of Lebanon on accepting this subscription and its volume.

358 bis 5 Article Four: Bank of Lebanon may subscribe to Lebanese treasury bonds on behalf of the non-resident financial sector, if the condition stipulated in paragraph (1) of Article Three of this decision is met.

Article Five: Banks and financial institutions that are found to have, due to executing certain operations, Lira-denominated accounts belonging to non-resident financial intermediation institutions and insurance companies, or credit deposits in Lira from the non-resident financial sector, must immediately provide a detailed status of these accounts to the Banking Control Committee and the Economics Department at Bank of Lebanon.

Article Six: Banks and financial institutions must deposit with Bank of Lebanon, immediately and for one month per daily balance, a special Lira reserve equal to the amounts representing the value of operations violating Article One of this decision, in a special interest-free account named "Reserve for Deposits, Loans and Accounts Opened in Lira for Non-Resident Financial Sector".

Article Seven: Bank of Lebanon charges penal interest to banks and financial institutions that do not comply with the provisions of Article Six above, calculated according to Article 77 of the Monetary and Discount Law and regulatory texts issued by Bank of Lebanon on this matter.

Article Eight: In addition to what is stipulated in Articles Six and Seven above, appropriate legal and administrative measures apply to banks and financial institutions violating the provisions of this decision.

Article Nine: Supervisors are requested to verify that the concerned banks and financial institutions implement the obligations specified in this decision, and to notify the Banking Control Committee and the Economics Department at Bank of Lebanon of any violations upon occurrence.

1. Directorate renamed to "Economics Department" per Decision No. 13779 dated 28/11/2025.
2. Amended per Article 3 of Intermediate Decision No. 10341 dated 22/12/2009 (Intermediate Circular No. 211).
3. Amended per Article 4 of Intermediate Decision No. 10341 dated 22/12/2009 (Intermediate Circular No. 211).

358 bis 6 Article Ten: The following regulatory texts issued by Bank of Lebanon are repealed:

• Circular for Banks No. 249 dated 07/11/1979
• Decision No. 6140 dated 04/04/1996 attached to Circular for Banks and Financial Institutions No. 1421 dated 04/04/1996
• Decision No. 6569 dated 24/04/1997 attached to Circular for Banks No. 1517 dated 24/04/1997
• Decision No. 7217 dated 04/02/1999 attached to Circular for Banks, Financial Institutions, and Exchange Offices No. 1696 dated 04/02/1999

Article Eleven: This decision takes effect upon issuance and is published in the Official Gazette.

Beirut, 15 April 1999 Governor of Bank of Lebanon: Riad Tawfiq Salamah

1. Circular numbers are according to the old numbering.