Zombie Banks and Phantom Laws: The Structural Failures of Lebanon’s Post-Collapse Banking Reform

Six years after Lebanon’s sovereign default and the effective collapse of its banking system, the country’s legislative reform effort remains trapped between international conditionality and domestic capture. The banking secrecy amendment of April 2025, the Bank Resolution Law of July 2025, and the draft Financial Gap Law of December 2025 represent the most significant legislative movement since the crisis began—yet each carries structural deficiencies that risk formalising, rather than resolving, the dispossession of depositors. This post examines why Lebanon’s banking reform architecture, as currently constructed, is unlikely to deliver either accountability or financial intermediation.

From Secrecy to Selective Transparency

The lifting of banking secrecy in April 2025 was presented as a historic rupture with Lebanon’s 1956 framework—the legal regime that for decades shielded bank accounts from judicial and regulatory scrutiny, facilitating capital flight, tax evasion, and the concealment of politically connected transactions. The new law grants the Banking Control Commission and the Central Bank retroactive access to banking records spanning ten years, enabling audits that were previously legally impossible. In principle, this is the necessary precondition for any credible restructuring: without accurate data on the composition of deposits, the scale of pre-crisis capital transfers, and the distribution of losses across institutions, no allocation framework can claim legitimacy.

In practice, however, the law’s efficacy depends entirely on institutional independence—precisely the quality that Lebanon’s financial governance has most conspicuously lacked. The Banking Control Commission remains structurally subordinate to the Central Bank governor, who chairs the Higher Banking Commission with decisive authority over restructuring outcomes. The question is not whether banking secrecy has been lifted in law, but whether it has been lifted in fact.

The Bank Resolution Law: Regulatory Capture by Design

Law No. 23 of 2025, passed on 31 July under heavy international pressure, establishes the framework for auditing, restructuring, or liquidating Lebanon’s insolvent banks. Its stated objectives—protecting deposits, fostering financial stability, limiting the state’s fiscal contribution—are unobjectionable. Its governance architecture is not. The Higher Banking Commission, the body charged with final restructuring decisions, includes the president of the National Institute for the Guarantee of Deposits (an institution dominated by commercial bank representatives), an economic expert selected from a list prepared by the Economic Instances (a body that counts the Association of Banks among its members), and a representative of bank shareholders. The Commission is chaired by the Central Bank governor.

This is not arm’s-length regulation. It is a restructuring framework in which the regulated effectively govern the regulator. The Parliament’s Finance and Budget Committee, whose members maintain well-documented ties to the banking lobby, amended the government’s original draft to produce precisely this outcome. The IMF recognised the deficiency, calling for amendments to align the law with international standards following its September 2025 staff visit to Beirut. The Constitutional Council subsequently annulled several provisions—including a clause that would have required all depositor lawsuits to be heard by a special court that has never been established—but the structural conflicts of interest within the Commission remain unaddressed.

The Financial Gap Law: Formalising Dispossession

The draft Financial Regularization and Deposit Recovery Law, approved by the cabinet in December 2025 with a narrow 13–9 vote, attempts to codify the allocation of approximately $70–80 billion in accumulated losses across the state, the Central Bank, commercial banks, and depositors. Under its current terms, depositors with balances up to $100,000 would receive repayment in cash instalments over four years. Balances exceeding that threshold would be converted into long-term bonds backed by Central Bank assets.

Two features of this framework merit particular scrutiny. First, the $100,000 ceiling represents a dramatic retreat from earlier proposals: the 2020 Diab government plan envisioned cash repayment of up to $500,000 per depositor. The gap between these figures is not explained by a deterioration in recoverable assets alone—it reflects the political economy of delay, in which each year of inaction shifted leverage further toward the banking sector and away from depositors. Second, the loss hierarchy, while nominally consistent with international practice (bank equity wiped out first), is undermined by the law’s treatment of state responsibility. Banks are required to bear only 40 per cent of withdrawal costs, despite their central role in the financial engineering that produced the crisis. The remainder is effectively socialised—distributed between the state (through treasury bonds pledged to the Central Bank) and depositors (through haircuts on balances above the ceiling).

The Contractual Dimension: Eurobonds and Creditor Hierarchy

Lebanon’s $31 billion Eurobond default remains unresolved. A key creditor group—including BlackRock and Fidelity—has reassembled and appointed financial advisers in anticipation of debt restructuring negotiations. The interaction between the Financial Gap Law and any eventual Eurobond restructuring raises fundamental questions of creditor priority. If the state pledges $10 billion in treasury bills to the Central Bank to service depositor certificates (as current estimates suggest), this commitment directly competes with the fiscal capacity available for sovereign debt service. The absence of a credible medium-term macro-fiscal framework—a point the IMF has repeatedly emphasised—means that commitments to depositors, bondholders, and reconstruction are being made without a clear picture of whether they are collectively feasible.

For business lawyers, the Lebanese case presents a live experiment in the limits of contractual certainty under conditions of systemic state failure. Eurobond covenants, deposit contracts, and now legislative frameworks exist in overlapping and potentially contradictory legal orders, with no supranational adjudicative mechanism to resolve competing claims. The precedent being set—or, more precisely, the absence of a coherent precedent—will shape sovereign debt restructuring practice for a generation.

Conclusion: Reform Without Accountability Is Not Reform

Lebanon’s 2025 legislative package represents genuine progress relative to six years of paralysis. But progress and adequacy are not synonyms. A banking reform that concentrates restructuring authority in the hands of the banking sector, a loss allocation framework that socialises costs while privatising impunity, and a depositor repayment plan that has shrunk fivefold over five years of political delay do not constitute a credible path to financial intermediation. Until the governance of the restructuring process is genuinely independent, the forensic audit of pre-crisis transactions is completed and acted upon, and the interaction between depositor claims and sovereign debt obligations is coherently resolved, Lebanon’s banking reform will remain what it has been since 2019: an exercise in managed decline, dressed in the language of recovery.

Nader Haddad is a Financial Economist, PhD in Mathematical & Computational Finance, and CEO at Eurocorporate Asset Management

The views expressed are the author’s own and do not represent those of any institution with which he is affiliated.