Lebanon’s financial collapse: Seven years on, who will foot the bill?

Nearly seven years after Lebanon’s 2019 financial meltdown, the country still faces a defining question: who should bear the cost of an estimated $70bn in financial losses? The government, Banque du Liban, commercial banks and depositors all have competing claims and responsibilities. As Beirut seeks to advance negotiations with the International Monetary Fund, the challenge is to turn years of reform pledges into a credible framework for restructuring the banking sector and recovering deposits.

Lebanon’s financial crisis came into the open in the autumn of 2019, exposing the weaknesses of an economic model built on public borrowing, capital inflows and banks’ ability to attract foreign-currency deposits, particularly US dollars. A substantial share of those funds was placed with Banque du Liban (BDL), the central bank, which helped finance the state’s needs and maintain monetary stability.

For years, the system depended on a steady flow of fresh capital to sustain existing financial commitments. Persistent fiscal deficits, mounting public debt, external imbalances and growing reliance on capital inflows eventually undermined that model.

In October 2019, banks began imposing informal restrictions on dollar withdrawals and transfers abroad. Without a unified capital controls law, depositors found themselves unable to access their savings on normal terms.

The crisis deepened in March 2020, when the Lebanese state defaulted on its foreign-currency sovereign debt. The value of Eurobonds held by domestic banks plunged, compounding losses across the financial system. The collapse of the Lebanese pound, soaring inflation and a sharp contraction in economic activity further eroded household savings and business confidence.

This was not simply a liquidity crisis. It was a solvency problem: the financial system’s obligations to depositors exceeded the resources available to meet them. The accumulated losses are estimated at about $70bn, although the final figure will depend on a comprehensive assessment of assets, liabilities and recoverable claims.

A paralyzed banking system, depositors still waiting

Seven years on, the crisis continues to shape the relationship between Lebanese savers and their banks. Depositors have yet to regain normal access to their funds, while banks remain severely constrained in their ability to mobilize savings and extend credit.

Measures introduced through successive BDL circulars have allowed some customers to withdraw limited amounts. These arrangements, however, fall far short of full repayment, with access depending on the rules applicable to each account and withdrawal scheme.

The consequences extend well beyond the banking sector. Cash transactions have become more prevalent; credit remains limited and confidence in financial institutions has been deeply damaged. Businesses struggle to finance investment and expansion, while frozen deposits represent retirement savings, education funds, working capital and, for many households, years of accumulated wealth.

Restoring a functioning banking system is therefore not merely a technical exercise. It is a prerequisite for reviving credit, supporting economic activity and rebuilding public trust.

Who should absorb the losses: the state, the central bank or commercial banks?

At the heart of the dispute lies a web of interlocking financial obligations between the Lebanese state, BDL and commercial banks. Establishing who should bear the losses requires a transparent assessment of these relationships, the assets available to meet outstanding claims and the legal obligations that remain enforceable.

The state: a debtor that cannot escape scrutiny

The March 2020 sovereign default inflicted substantial losses on holders of Lebanese government debt, including domestic banks. Years of public borrowing and the state’s financing needs also contributed to the vulnerabilities that preceded the collapse.

The Association of Banks in Lebanon (ABL) has invoked the state’s role in the crisis to challenge new tax demands from the Ministry of Finance. In a letter dated October 20, 2026, to Finance Minister Yassine Jaber, the association argued that banks’ losses cannot be assessed without accounting for the sovereign default and BDL’s obligations to commercial lenders. It also cited Article 113 of the Code of Money and Credit to support its interpretation of the state’s obligations towards the central bank.

These remain the association’s legal arguments, not a definitive judicial ruling.

The underlying question is difficult to avoid: should the state contribute to absorbing losses that its own borrowing and financing policies helped generate? If so, how much can it reasonably afford, given its limited fiscal capacity and the competing demands of reconstruction and social protection?

A substantial recapitalization of BDL by the Treasury could, in principle, help cover part of the shortfall. But the cost would not disappear. It could translate into higher public debt, additional taxes or difficult spending choices, shifting a significant share of the burden onto taxpayers and future generations.

Banque du Liban: at the center of the financial shortfall

BDL is central to any resolution of the crisis. Commercial banks placed substantial foreign-currency funds with the central bank, much of which originated from customer deposits. Its inability to meet these obligations in full is a major component of the financial system’s shortfall.

Any recovery plan therefore requires a transparent assessment of BDL’s balance sheet, assets, liabilities and outstanding claims. Book values must be distinguished from the economic value of assets that can realistically be mobilized.

The central bank’s gold reserves, other assets and potential future income are part of this debate. But assets cannot automatically be treated as immediately available cash, nor can their nominal value be equated with resources that the state can deploy without legal, financial or monetary consequences.

The objective must be to establish how much BDL can credibly contribute to resolving the crisis without undermining its ability to perform its core monetary and financial functions.

Commercial banks: real losses, but accountability remains essential

Commercial banks argue that they have suffered heavy losses through their exposure to the sovereign and to BDL. They have also challenged aspects of the tax treatment applied to their transactions during the crisis years.

In its correspondence with the Ministry of Finance, the ABL estimated that the new tax demands could generate about $600mn in potential additional liabilities for the sector. The association argues that these charges could reduce the resources available to help resolve the deposit crisis. The figure is the ABL’s estimate, not a final tax assessment independently established.

The banks’ losses, however, do not settle the question of their own responsibility. Their asset quality, capital positions, investment decisions, risk management and compliance with obligations to depositors all require scrutiny. Authorities must also determine which institutions can be restructured and which may need to enter resolution or liquidation.

Bank restructuring cannot stop at recognizing losses. It must establish accountability, apply the appropriate consequences to shareholders and relevant creditors, and identify which banks can become viable again.

Depositors: why should they bear the first losses?

Depositors are creditors of the banks. Yet since 2019, they have already absorbed a substantial share of the crisis through restricted access to their savings, the erosion of purchasing power and limits on their ability to transfer or use their funds.

The IMF has consistently emphasized the need for a credible hierarchy of losses, under which shareholders and subordinated creditors bear losses before depositors. Any recovery framework must also be compatible with the banking sector’s viability and the sustainability of public debt.

This does not mean that all deposits can be repaid immediately, or that full recovery is guaranteed by the resources currently available. It means that losses must be allocated under clear, transparent and legally sound rules, rather than leaving depositors indefinitely exposed to the consequences of a crisis they had little power to influence.

Protecting small depositors is a particular social priority. But promises of repayment must be supported by identifiable funding sources, a realistic timetable and verifiable safeguards. Without them, a proposed solution risks replacing years of uncertainty with commitments that institutions cannot fulfil.

October 2026: legislative progress, but no definitive settlement

Recent months have brought some progress, but the central questions remain unresolved.

In August 2026, parliament approved amendments to the banking resolution law. The IMF welcomed the move as an important step towards restructuring the sector. President Joseph Aoun subsequently referred certain provisions to the Constitutional Council, renewing questions about the legal framework and BDL’s powers.

The most politically sensitive issue remains the proposed financial stabilization and deposit recovery law, commonly referred to as the Gap Law. Its purpose is to recognize the losses, determine how they should be allocated and establish the terms on which depositors may recover their funds. The financing of that process, and the respective contributions of the state, BDL and commercial banks, remain contested.

Following its visit to Lebanon from September 15 to 18, 2026, the IMF reiterated that legislation must respect the hierarchy of claims, protect depositors in accordance with those principles and ensure the banking sector’s viability. It also stressed the need for a credible 2027 budget and a medium-term fiscal framework consistent with debt sustainability. As of October 21, the conditions for a comprehensive new IMF program had not yet been met.

The debate has been further complicated by the tax dispute between the Ministry of Finance and commercial banks. Tax authorities have asked lenders to review certain tax returns covering 2020–2025, including the treatment of eurobond provisions, foreign-exchange differences and income recorded in foreign currencies. The ABL has challenged the demands and called, among other measures, for the October 31, 2026 deadline to be suspended.

The dispute highlights a fundamental tension: how can the state collect taxes legally due, restore public finances and rebuild banks capable of contributing to deposit recovery at the same time?

The answer cannot rest on competing assertions alone. It requires a transparent legal and accounting review, together with a bank-by-bank assessment of the capacity to bear the proposed charges.

The IMF: a catalyst for reform, not a silver bullet

Negotiations with the IMF remain central to Lebanon’s recovery. A program could help restore financial credibility, unlock international support and provide a framework for restructuring the economy.

But a preliminary agreement at staff level is not the same as a fully approved financing program, which requires further steps and formal approval by the Fund’s governing bodies. Even a comprehensive agreement would not mean that deposits would be repaid immediately, nor would the IMF itself cover the accumulated losses.

The Fund’s demands center on a coherent package of reforms: recognition of financial losses, bank restructuring, sustainable public debt, stronger governance and improved state revenues. These measures may involve short-term costs, particularly if they require additional taxation or tighter public spending.

The challenge is to ensure that the adjustment does not once again fall disproportionately on households and businesses already weakened by the crisis. Reform will only be credible if the burden is allocated fairly, vulnerable groups are protected and the conditions are created for a sustainable recovery in credit and investment.

Seven years after the financial collapse, Lebanon can no longer defer a decision on the fate of its deposits. The losses must be recognized, responsibilities established and the distribution of the burden governed by a coherent, enforceable and transparent legal framework.

The question is no longer simply who will pay, but in what order, under which rules and with what guarantees. A durable settlement requires verifiable figures, a clear hierarchy of claims, a credible mechanism for recovering deposits and genuine accountability.

Lebanon will not restore confidence through another round of promises. It will do so only when responsibility is established, losses are allocated fairly and depositors’ rights are translated into tangible results.