In the ongoing discussions at the cabinet table regarding the draft law for financial regularization and deposits recovery (financial gap), and the leaks to the media, several questions arise about the stance of the central bank governor, Karim Souaid, on the project.

This comes amid claims that he is siding with banks to defend their interests. In reality, since the government began debating the draft law, the governor has been subjected to a campaign led by parties affected by the Central Bank’s circulars targeting the cash-based economy and financial transfers. This campaign has focused on portraying the governor as an ally of the banks, reviving comparisons with the relationship that once prevailed between banks and the former governor. 

Some banks have taken advantage of this campaign to pressure the governor into easing the strain on the banking sector caused by provisions in the draft law, which banks consider unfair and excessively harsh.

The problem for banks is that they failed to approach the draft law positively, despite advice from several quarters to do so. Instead, they are seeking to improve the conditions imposed on them by demanding a grace period to restructure their operations and increase their capital, allowing them to contribute to absorbing the losses they will inevitably incur under the law, losses they can no longer deny or shift onto others under the pretext that they were forced to place funds with the Central Bank and had no alternative options. Some have even raised a rhetorical question: Had the state required banks to invest in gold, for example, would they have acknowledged their profits and shared them with depositors?

Banks reacted emotionally and rushed to attack the draft law, despite being fully aware that its formulation was intentionally designed to protect them from accountability, notably by avoiding the proposal of a forensic audit whose outcomes are widely seen as predetermined.

Banks have placed the governor in an unenviable position. He is legally mandated to regulate the banking sector and ensure the health and revival of the financial and banking system, given its crucial role in boosting the economy and enhancing investment. In practice, the Central Bank is accused of either doing too much or too little. Yet it is set to shoulder the lion’s share of losses, up to 60% of cash payments and 80% of any repayments made through shares or assets. Can it do more? Possibly, say informed financial sources. But should it? Certainly not. The Central Bank is the regulator and guarantor, and stripping it of all its liquidity and assets would mean there would no longer be a lender of last resort to rescue the banking sector. Meanwhile, the banks are obliged to recapitalize and regain their financial solvency. It must be acknowledged that the banks have lost their private equity rights, their holding of Eurobonds is questionable and suspicious, and they are living a crisis of trust after losing their clients, finding themselves in a state of difficulty and near bankruptcy.

In his latest statement expressing his opinion on the draft law, in a direct response to criticism, under the banner of protecting the banking sector, the governor stated that “In the context of preserving financial stability, we express serious reservations based on well-established legal principles, recognized accounting standards, and international precedents against any approach that would lead to the systematic depletion or complete elimination of banks’ private capital before removing non-performing claims from their balance sheets, and prior to the subsequent application of the creditor hierarchy.”

Under the Financial Stability and Deposit Repayment Law (FSDR), commercial banks are considered partners in the deposit repayment framework and constitute the primary driver of credit intermediation necessary to achieve economic recovery.

Accordingly, any solution that leads to the systematic destruction of banks’ capital would harm depositors, undermine prospects for economic recovery, and deepen the expansion of the informal cash economy.

Disclaimer: The opinions expressed by the writers are their own and do not necessarily represent the views of Annahar.