Do Banks Bear the Moral, Ethical and Legal Responsibility for Loss of Depositors Money

It is the case with all things in Lebanon, and the financial crisis is no exception, we eventually separate into opposing teams, each one hating the other’s view point passionately and each with preconceived notions of their own that they hold as a set of inviolable truths. They face off angrily on talk shows (although not so much now as each TV tends to host guests with compatible viewpoints that match its own), on the streets, in social media, in the Press, and the Press itself, the local Press that is, isn’t shy in joining in the mass cacophony of clashing voices and viewpoints. 

 

Today, we see two camps: the “poor banks, we need them, don’t scare them away, we can’t live without them” team, and the “hang ‘em in public squares and close down these criminal banking institutions” team. Each one believes they hold a monopoly on truth, but, as is often the case, they get lost in meaningless minutia and ignore the big picture. Setting aside the fact that the state, the central bank, the banks, and to varying degrees some large depositors, all bear a portion of the responsibility for the hole we find ourselves in, the question remains who bears the greater responsibility?

Today, bank store fronts in Badaro burned as depositors demanded their money, threw rocks, and promised worse to come, in an impulsive combustive righteous street paroxysm

“As a fiduciary, a bank's primary duty is the management and care of property for others. The Board of Directors and senior management must be able to identify, measure, monitor and control the risks inherent in fiduciary activities, and respond appropriately to changing business conditions,” this is according to the US government’s Federal Deposit Insurance Corporation (FDIC) website. What does “management and care of property of others” mean in this context? It means money we put on deposit with a bank, it is the bank’s responsibility to manage it and care for it, our property, in the form of liquid cash assets, by Identifying, Measuring, Monitoring, and Controllinginherent Risks. This is where the Lebanese banking system failed utterly.

 

When greed is your only motivation, and you gloss over the glaringly obvious risks of over exposure to the sovereign in a country racked with long standing systemic problems, then you as a bank fail to care for the property of others. That is the guilt of the banks. It may not be as clear to prove in a court of law without the aid of experts in the field and in-depth forensic audits of all banks’ books, but there is a clear case for negligence at the very least if not criminal complicity with the political class. Complicity? To what end? You ask. The end of financing the running costs of a failing state and making bucket loads of cash in the process for 30 years, all marked as profits and disbursed as dividends to the owners of the banks, and all probably safely tucked away years ago in accounts in Switzerland or Lichtenstein or some other off shore tax shelter.

 

Now some say the state is to blame. Well the state is not a corporation or a limited liability company or a partnership, it’s the property of every Lebanese living today and yet unborn for generations to come. The state is not an individual or a group of individuals, even though groups of individuals did and do run the whole damn thing! So, by saying the state and its central bank bear the lion’s share of the responsibility for repaying depositors, you are placing a huge debt burden on future generations of Lebanese and hobbling the state from carrying out its vital tasks of caring for the social, health and educational wellbeing of citizens, as well as maintaining and investing in state infrastructure, all of which would be needed if the national economy is to recover.

 

So, while individuals entrusted with running the state borrowed and spent money lent to them by the local banks, the state cannot be expected to plug the huge financial hole that has generated. Banks ultimately lent money irresponsibly to the state without taking into account the glaring risks involved, and they did so because they made huge amounts of money from exorbitant interest rates, more than they could ever dream of making had they lent mostly to the productive sectors of the economy. 

 

So, greed is the moral and ethical charge laid at banks’ doors, many of which were in flames today. Is this sufficient to charge the banks with responsibility for the loss of depositors’ monies? I think it is. And I believe that Lebanese banking will shrink, banks will lose, as they have already lost, most to all of their capital. Should they recapitalize, the emerging new banks, fewer in number, will be smaller. Many banks faced with a united political front, will acquiesce and submit to the inevitable, to sell their assets abroad, to return their saved profits from abroad, and pump that cash into new and revitalized banking institutions. They would be in better shape to pay up to $100,000 per depositor over time. As for the rest, the larger depositors, they would be given shares in the new leaner and meaner banking institutions.

 

We need our banks, there is no doubt about that, and we are proud of our long standing banking tradition in this country, we don’t want to be known around the world as the world’s worst financial crisis brought about by a clique of untrustworthy politicos in league with greedy bankers! This is the last thing I want for my country. I want our banks to be strong again, to stand on their own two feet again, which necessitates a painful haircut for the banks! This would be followed by the same, but less painful haircut for depositors, alas, there is no escaping that. And finally, bring all those who were in charge of the state for over 30 years to book, investigate them and bring them to trial and whoever is found guilty of wasting and embezzling public funds and corrupt practices, hand them harsh prison terms. That is how we fix our country, root and branch, not simply sweep our problems under the proverbial rug for the next generation to deal with!