Lebanese lawmakers approved crucial banking restructuring legislation  on Thursday night, establishing a framework for handling defaulting banks and creating an oversight commission for banking sector reorganization. The move represents Lebanon's most significant step toward meeting International Monetary Fund (IMF) conditions, though its implementation will depend on the passage of complementary legislation.

What the new law establishes

The banking restructuring law creates several key mechanisms for addressing Lebanon's collapsed financial sector. The legislation establishes a new oversight commission to manage the reorganization of the banking sector, with the central bank holding an influential vote in determining the fate of defaulted banks. This body will have broad authority over restructuring decisions and bank resolution processes.

The law provides authorities with a structured framework for dealing with insolvent banks, setting out clear procedures for how defaulting financial institutions should be handled. The structure closely follows central bank governor Karim Souaid's original proposal, giving the monetary authority significant influence over restructuring decisions, a point of ongoing debate regarding appropriate central bank independence.

Importantly, while the law creates the legal foundation necessary for implementing broader banking sector reforms, the framework cannot function without the complementary Financial Gap Law that would determine actual loss allocation among stakeholders. This makes the current legislation a crucial but incomplete step toward banking sector recovery.

Legislative milestones under new government

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The Banking Restructuring Law is the second legislative milestone accomplished by Lebanon's new government toward reforming the Lebanese banking sector. The first reform was the Banking Secrecy Reform, passed in April 2025. Whereby the Parliament amended the 1956 banking secrecy law, granting authorities retroactive access to banking records for the past ten years. This marked a breakthrough on a key IMF requirement previously stalled for years.

The crucial role of the financial gap law

Despite this progress, the most significant hurdle remains the so-called "Financial Gap Law," which would determine how the estimated $70 billion in banking sector losses are allocated among stakeholders, including the government, central bank, commercial banks, and potentially depositors.

This law is essential for implementing the banking restructuring framework, but it has yet to be written. Its development requires detailed bank-by-bank audits, which cannot proceed until the banking control commission becomes fully operational. Without this law, the restructuring process cannot move forward, making it the most critical missing component in Lebanon's path to financial recovery.

The law will also clarify the extent of losses absorbed by the state versus those imposed on private sector actors, potentially including depositors. This issue is politically explosive, given that many Lebanese citizens have already lost access to their life savings.

Lebanon's historic economic collapse

Lebanon went through one of the most severe financial crises in modern history since 2019. Real GDP fell sharply from $52 billion in 2019 to $28.3 billion in 2024, marking a nearly 40% contraction. Simultaneously, the Lebanese pound lost over 98% of its value, with hyperinflation peaking at 221.3% annually in 2023.

The social and economic toll was equally devastating. Poverty rates tripled, rising from 12% to 44%, with some studies estimating that more than 60% of the population is now living below the poverty line. The banking system effectively collapsed, trapping an estimated $93 billion in deposits, while banks imposed severe withdrawal limits ranging from $250 to $500 per month.

The crisis stems from decades of fiscal mismanagement. Public debt surged to 170% of GDP due to post-civil war reconstruction spending, largely financed by domestic banks through what many analysts describe as a Ponzi-like scheme. The breaking point came in 2019, when confidence collapsed and the capital inflows Lebanon relied on to finance large current account deficits abruptly stopped because of Western sanctions.

IMF conditions

In April 2022, the Lebanese government reached a staff-level agreement with the IMF for a $3 billion Extended Fund Facility, structured around five key reform pillars:

• Financial sector restructuring: Acknowledging $70 billion in banking losses, protecting small depositors, conducting forensic audits, and implementing bank resolution frameworks.
• Fiscal reforms: reforming state enterprises, particularly Électricité du Liban, and restructuring external debt.
• Monetary policy: Unifying multiple exchange rates, establishing credible monetary frameworks, and ending deficit financing by the government.
• Governance: Amending banking secrecy laws, strengthening anti-money laundering systems, and operationalizing anti-corruption institutions.
• Structural Reforms: Modernizing public financial management, reforming the civil service, and developing regulatory frameworks.

Political pressure

Lebanon’s government is under increasing international pressure to implement reforms before it can access reconstruction funds, particularly for areas devastated during "Israel's" war on Lebanon. The legislative process leading to the restructuring law involved months of negotiations between the central bank, the Ministry of Finance, and the Parliament.

One of the central debates is the degree of independence granted to the central bank under the new law. Critics argue that the framework could excessively expand central bank power, while supporters maintain that it maintains a proper balance of oversight. This is especially sensitive given the controversial legacy of former central bank governor Riad Salameh, widely blamed for enabling the crisis.