For once, Lebanon stands as a model of how things should be done. BBC writes about how Lebanon’s banks have survived the global financial crisis and have even thrived while other banks all over the world have suffered.
What banks in Lebanon have done right, says the article, is that they have refrained from investing in highly risky securities that have cost banks in the US and Europe billions and have plunged financial markets in a deep morass. The central bank governor claims that he expressly forbade banks from dabbling in those risky investments because he maintained a conservative regulatory policy.
I would add some caution against taking this as some sign of the superiority of the Lebanon bank regulation model. In my view, the Lebanese banks have avoided the crisis largely because banking in Lebanon is at least 40 years behind the rest of the world, and because we are essentially in a permanent recession. What does not go up cannot possibly come down.
Banks simply do not lend to the extent they should. In part, this is due to the fact that banks learned their lesson following the real estate crisis of the late 1990s. This followed several years of a boom in real estate when banks extended huge loans to developers and then got caught out when the market collapsed. It later emerged that many of the loans went to people well connected to bank management.
As for being behind the times, banks in Lebanon have simply not delved into the new financial investments due to the traditional scepticism of regulators. While this looks like a good thing at a time of crisis, the Lebanese economy missed the benefits of those developments in prior years. These include higher levels of investment and a better distribution of risk.
Just because things have gone badly in the US and Europe does not mean we should throw out everything that has happened in banking during the last few decades. The central bank governor would like us to believe that banks in Lebanon picked and chose the best of those new instruments, when in fact they simply rejected them all outright.
