Independence of Lebanese

Central Bank compared with

FED and ECB
:Project presented by
Aline Chelala Kahwaji
Rebecca Sidawi
Anthony Saade
Marwan Azouri
:To
Dr. Nehme AZOURY
Outline:
1. Lebanese Central Bank (BDL)
2. European Central Bank (ECB)
3. Federal Bank Reserve (FED)
4. Independence of the CB
5. How to perform a better Governance
Part 1: Lebanese Central
Bank (BDL)
History & context of BDL
 Due to the fact that concession to issue the
Lebanese pound was coming to an end in
1963. Lebanon decided, since the
Convention of May 29, 1937 to create a
central bank.
 It started to operate effectively on 1st April,
1964.
 It has established the ‘Banque du Liban’ with
the privilege of issuing the national currency.
History & context of BDL
 BDL is a legal public entity enjoying financial and
administrative autonomy.
 The capital is totally appropriated by the State.
 The rate of the Lebanese pound was set in pure
gold.
 The hard currencies were to be computed on the
basis of the new provisional legal rate, and for
the State external expenses, they continued to
be transferred at the free market rate.
History & context of BDL
 The gold and foreign-currency assets
included in the balance sheet of the
Banque du Liban had to be revalued on
the basis of the new provisional legal
rate.
 The coverage of the Lebanese pound is
secured with gold (9,222,000 ounces)
and dollar reserves
History & context of BDL
 A partial transformation of the Lebanese
pound to the Euro might be considered
in the near future, depending on the
development of economic and
commercial activities of the country.
 Mission, Function and
Objectives
 Monetary and economic stability,
 Soundness of banking sector.
 Development of money & financial markets.
 Development & regulation of the payment
system and instruments.
 Money transfer operations.
 Cooperation with Government
 Foreign Currency Supervision
 Control of Liquidity
 Banking Regulations Insurance
Structure and Governing
Body

1st Vice Gov. (all 5y.)

4th Vice Gov.

Governor (6y.) 2nd Vice Gov.

3rd Vice Gov.

Directors of BDL
 Mr.  Riad T. Salameh Governor & Chairman
 Mr.  Raed H. Charafeddine First Deputy
Governor
 Mr.  Saed Andari Second Vice-Governor
 Mr.  Muhammad Baasiri Third Vice-Governor
 Mr.  Harout Samuelian Fourth Vice-Governor
  Mr. Alain Biffani Director General of the
Ministry of Finance.
Management of BDL
THE GOVERNING BODY
 The Governor
 Vice-Governors
 The Central Council:
Governor
The four Vice-Governors
The Director General of the Ministry of Finance
The Director General of the Ministry of
Economy and Trade
The Government Commissariat
 Branches & Departments of
BDL
 BDL Branches (9 all over Lebanon)

 BDL Departments (19)

Fin. Markets .Current Op Branches Banking Accounting

IT Gen. Foreign Foreign .Fin. Op

Secretariat Exchange Studies
Real Est. & Training & Personnel Legal Inspection &
Fin. Assets .Develop Audit
Org. & Treasury Stats & Econ. Purchase &
Development Research Maintenance
Control procedures of BDL
 Control on financial operations for fighting money
laundering
 Checking the client's identity, determining the
economic right owner (the actual beneficiary) of the
intended operation.
 Controlling some operations and clients
 Committees and administrative units in charge of
the control of operations for fighting money
laundering.
 Final Provisions.
Control procedures of BDL
Control on financial operations for fighting
money laundering:

 Ascertain that correspondents dealing with them really

exist. They must make sure that the foreign bank with which
they deal Is not a shell bank.

 Exercise control on their operations with clients to avoid

involvement in money laundering operations.
Control procedures of BDL
Checking the client's identity, determining the economic right
owner (the actual beneficiary) of the intended operation

 Adopting clear procedures for opening new accounts. They

must also check the identity of all their permanent and transient
clients, whether resident or non-resident.
 Requesting from each client a written statement about the
identity of the economic right owner (the actual beneficiary) of
the intended operation, notably his full name and residential
address and information about his professional and financial
status.
 Checking periodically the identity of the client or re-determine
the economic right owner.
Control procedures of BDL
Controlling some operations and clients
 Enquiring from the client about the source and destination of funds.

 When accepting a check drawn or executing banking transaction or

when the value of the check or transaction exceeds USD 10,000 or its
equivalent the bank must:
- Make sure that it has received the notification, the source and
destination of funds, and the identity of both the beneficiary and the
beneficial owner.
- Keep this notification for a five-year period.

 Informing the Governor of the Banque du Liban in his capacity as

chairman of the Special Investigation Commission.
Control procedures of BDL
Controlling some operations and clients

 Adopt a risk-based approach to classify clients and transactions:

- Customer risks
- Country risks
- Service risks
 Establish risk-based control measures and procedures, and adopt the
following measures and procedures :
- Raise awareness concerning strict control as a priority.
- Obtain more detailed information about clients
- Obtain the necessary administrative approvals, which allow dealing with
customers and executing transactions.
- Undertake periodic reviews of relationships with customers.
- Make continuous peer comparisons
Control procedures of BDL
Committees and administrative units in charge of the control
of operations for fighting money laundering, and their tasks.

 Establish a special committee consisting of the Director

General, the Risk Director, the Operations Director, the
Treasury Director, the Branches Director, and the person in
charge of the Unit.

 Establish a unit to ascertain compliance with the laws,

regulations and procedures in force, hereafter named "the
Compliance Unit".

 Appoint an officer responsible for the control of operations.

 Control procedures of BDL
Final Provisions
 Establish a computerized central archive of Collected information
that would include, for indicative purposes but not restrictively, the
names circulated by the Special Investigation Commission, and those
of holders of doubtful accounts reported by the bank/financial institution
itself. The latter must also notify the SIC about any account opened
subsequently by any of these persons, whether directly, indirectly, or by
proxy.
 Ensure an ongoing training of their staff and the participation of the
concerned officers and those responsible for training in relevant
seminars, workshops and lectures, so that they may keep abreast of
money laundering-fighting methods.
 Not close any suspicious account before consulting with the SIC.
 Keep a special record of persons who open or activate accounts by proxy.
 Require, for recruitment, the highest standards of honesty
Control procedures of BDL
Final Provisions
 Instruct their staff that, subject to liability, they must refrain from
notifying Clients when the SIC proceeds to investigate or audit their
accounts, until the SIC makes a decision on lifting banking secrecy on
he said accounts and notifying the concerned clients.

 Inform their branches operating abroad that they must, as a minimum,

apply the procedures mentioned in these Regulations, provided they
are not incompatible with the laws and rules of the host country.

 When enlisting the help of intermediaries such as brokers and

introducers, to deal only with those who meet the criteria adopted by
banks and financial institutions in dealing with their clients.
Social responsibility issues
of BDL
1.The safeguard of monetary and economic stability
2.The safeguard of the soundness of the banking sector
3.The development of money and financial markets
4.The development and regulation of the payment systems
and instruments
5.The development and regulation of money transfer
operations including electronic transfers
6.Development and regulation of the clearing and
settlement operations relative to different financial and
payment instruments and marketable bonds.
Part 2: European Central
Bank (ECB)
History & context of ECB
 Plans for a single currency started in the late
1960's
 Three levels of EMU integration: EU
Accession, Exchange Rate Mechanism
(ERM), Eurozone
 Maastricht Treaty of 1992, Copenhagen
Criteria of 1993, individual Accession
Framework
 Four Convergence Criteria to join Eurozone
Three level of EMU integration:
Four Convergence Criteria:
1. Inflation Rate, should be no more than 1.5
percent.
2. Government finance.
Should not exceed 3% of the annual deficit to
the GDP.
The government debt should not exceed 60%
of the GDP.
3. Exchange rate, applicant countries should have
joined the ERM (European Rate Mechanism)
under the EMS (European Monetary System).
4. Long term interest rate, should not exceed 2%.
History & context of ECB
 The national central banks are an
integral part of the ESCB (Eurosystem
Central Bank).
 European Central Bank siege is in
Germany, Frankfurt.
Mission, Function and
Objectives
 Monetary and economic stability
 Development & regulation of the payment system
and instruments.
 Money transfer operations.
 Cooperation with Governments and NCB’s
 Foreign Currency Supervision
 Control of Liquidity
 Banking Regulations Insurance
 Supervising the four convergence criteria's
Structure and Governing
Body
The tasks of the governing
body
 Governing Council:
- Formulating monetary policy, which means, key ECB interest
rates and liquidity.
- Adapting guidelines and decisions to ensure the performance
of the tasks of the Eurosystem.
 Executive Board:
- Implementation of the monetary policy.
- Preparation of meetings for the governing council.
- Conduct of the day - to - day business.
 General Council:
- Reports on the four convergence criteria.
- Contributes in advisory functions, collection of statistical data,
the reporting activities and the laying down of the conditions of
the employees.
Executive Board
 Jean-Claude Trichet
President of the ECB
 Lucas D. Papademos
Vice-President of the ECB
 Lorenzo Bini Smaghi
Member of the Executive Board
 Josee Manuel Gonzalez-Paramo
Member of the Executive Board
 Jurgen Stark
Member of the Executive Board
 Gertrude Tumpel-Gugerell
Member of the Executive Board
Management of ECB
Tasks and the control
procedure
1. To conduct foreign exchange operations
2. To define and implement monetary policy
3. To promote the smooth operation of payment
systems
4. To hold and manage the official foreign reserves
of the participating EU member State
5. Collection and compilation of statistics
6. International cooperation
7. Advisory functions
8. Issuance of banknotes
Definition of some of the Tasks
and the control procedure
1. Eurosystem policies:
The Governing Council of the ECB is in charge of monetary policy for the single
currency. This includes the definition of price stability, how inflationary risks are
analyzed, etc.
2. Deciding, coordinating & monitoring the monetary policy: The ECB instructs the
NCBs on the details of the required operations (value, time, date, etc.) and checks
their successful execution.
3. Interventions on the foreign exchange markets:
If needed, also jointly with individual NCBs. This involves the buying and/or selling of
securities on foreign exchange markets.
4. Monitoring financial risks:
This involves assessing the risks of securities, either those purchased in the context
of the investment of the ECB's own funds and foreign reserves or of those securities
that have been accepted as collateral in Eurosystem credit operations.
5. Banknotes:
the ECB has the exclusive right to authorize the issuance of banknotes within the
euro area.
Part 3: Federal Reserve Bank
(FED)
Background:
 Since the charter for the Second Bank of the
United States was allowed to expire the U.S. had
been without a central bank for almost eighty
years. After different financial panics, particularly
a severe one in 1907, some Americans became
convinced that their country needed some sort of
banking and currency improvement, that would
provide a ready reserve of liquid assets, when
the USA is threatened by financial panics, and in
addition allow for currency and credit to expand
and contract seasonally within the U.S. economy.
History of the FED:
 The Federal Reserve System was
created by an act of congress on
December 23, 1913 served as the
nation’s central bank. The System
consists of a seven member Board of
Governors with the HQ in Washington,
D.C., and twelve Reserve Banks
located in major cities throughout the
United States.
History of the FED:
 The Federal Reserve Act
is the act of Congress that
formed the Federal
Reserve System, the
central banking system of
the United States of
America, which was
signed into law by
President Woodrow
Wilson.
Structure and Body:
 12 Federal reserve banks for 12 districts in the
states
 7 members board governors elected by the president of the
United State of America and confirmed by the senate, they
serve for a period of 14 years.
 Chairman is elected from the board of governors for 4 years.

 Federal Open Market Committee

 Board of governors
 Governor of NY FRB
 4 other FRB governors

 Federal Advisory Council

Formal Structure of FED
Informal Structure of FED
Executive Board of the FED
 Ben Bernanke Chairman of the board
 Donald Kohn Vice - Chairman
 Kevin Warsh
 Elizabeth Duke
 Danielle Tarullo
 And two other vacant position
Role and responsibility of each
body:
 Roles and Responsibility of the 12 FRBs
 Clear checks and issue currency
 withdraw damaged currency from circulation
 evaluate proposed banks mergers
 administer discount loans in their own districts
 coordinate between business community and the FRS
 examine bank holding companies and state chartered
banks
 collect data on local business conditions
 Participate in the monetary policy through their staff of
professional economists
Role and responsibility of each
body:
 Roles and Responsibility of the Board of
Governors
 decide about the monetary policy

 Sets reserve requirements

 sets the presidents salary and the officers

 review bank mergers

 specify activities of the bank holding

companies
Role and responsibility of each
body:
 Roles and Responsibility of the FOMC
(federal open market committee)

 Meets eight times per year

 decides regarding the conduct of the open market
operations
 after each meeting they set the federal fund and
discount rates
 They issue the three research books (Green, blue
and beige books).
Part 4: Independence of the
CB
 A Comparison Between:
 BDL

 ECB

 FED
 Concept of dependency
 Central Bank have the authority to decide about the
monetary policy
 Central Bank have the authority to ensure price stability
 Central Bank is able to take a long term decisions
 There is no interference of government or political leaders
Relation with the Inflation
 There’s a negative correlation between Independence and
inflation:

 BDL : existence of inflation (Lack of independency)

 FED : control of inflation (decision maker)
 ECB : controls inflation by setting low interest rates (decision
maker)
Relation with budget deficit
 There’s a correlation between Independence and budget
deficit. The most independent CBs revealed a budget deficit
 BDL: government spending still high, so the BDL is not highly
independent
 FED: The Federal Reserve act prohibits the Fed from buying the
debt directly from the Treasury instead the Fed buys treasury
bonds in the open market.
 ECB: no direct relation with budget deficit because it’s not a
national CB
Relation with the GDP
 There’s no relation between these variables and
independence. But higher inflation is associated with lower
economic growth. The primary goal must be to promote
price stability.

 BDL : Slow growth

 FED : Monitors GDP in order to decide on the best monetary policy
 ECB : keeps inflation low to maintain price stability
Political business cycle
 A CB who is susceptible to political direction or pressure
may encourage economic cycles (boom and bust).

 BDL : it is still concerned with politicians’ short-term objectives

 FED : Its monetary policy does not always conform with political
objectives
 ECB : it has a total political independence
Monetary Policy
 An Independent CB can run a more credible monetary
policy, making market expectations more responsive to
signals from the CB.
 BDL : decides for monetary policy and sets terms and regulations
 FED : implements a non inflationary policy which Stabilizes
economic cycle & financial markets
 ECB : with ECB, markets know what to expect. The ECB decides
separately
Fiscal Policy
 Fiscal policy is not isolated from monetary policy. It’s
important to reach economic stability.
 BDL : coordination between the BDL and the government
(Taxation)
 FED : Sometimes the monetary policy of the Fed outweighs the
Fiscal policy of the government
 ECB : it has no fiscal agent function as it’s not a national CB.
There’s no financing of the public sector.
Part 5: How to perform a better
Governance and what was the
response of the BDL
Corporate Governance
 The Organization for Economic Cooperation and Development (OECD) principals define
corporate governance as involving a set of relationships between a company’s
management, its board, its shareholders, and other stakeholders. Corporate governance
also provides the structure through which the objectives of the company are set, and the
means of attaining those objectives and monitoring performance are determined
 From a banking industry perspective, corporate governance involves the manner in
which the business and affairs of a bank are governed by its board and senior
management, including how they:
 Set the bank’s strategy and objectives,

 Determine the bank’s risk tolerance/appetite

 Operate the bank’s business on a day-to-day basis

 Protect the interests of depositors, meet shareholders obligations, and take

into account the interests of other recognized stakeholders; and
 Align corporate activities and behavior with the exception that the bank will
operate in a safe and sound manner, with integrity and in compliance with
applicable laws and regulations.
Importance of Corporate
Governance
Central Banks must definitely have strong corporate governance
practices because:
 It manages a big portion of the nation’s wealth

 It influences the growth of economy

 It may influence the other non-banking sector

 One single bank may cause a general crisis

Good Corporate Governance will ensure:

Better information flows

Strategic decision making

Improved market understanding

More efficient allocation of resources

Reduction of capital costs

Prevention of abuse of minority shareholder’s rights

Building trust among investors

Long lasting business relationship with stakeholders

Objective of Banking Control
Commission of Lebanon
 The Banking Control Commission of Lebanon (BCCL) was established in 1967
by law no. 28/67, as an administratively independent body to replace the
banking control department of the central bank.
 The commission is composed of five members who are appointed by the council
of ministers for a five-year term
 The BCC's function is to supervise banks, financial institutions, money dealers,
brokerage firms and leasing companies.
 The BCC performs its supervisory functions as an independent body, but in
close coordination with the Governor of the Central Bank
 The BCC evaluates financial soundness of regulated entities. This is done
through on-site and off-site reviews
Corporate Governance
 BDL issued intermediary circular No.60 requiring all investments and
placements and decisions of a bank to be taken by specialized
committee
This committee is responsible to study and understand all kinds of
investments in capital and money market.

 BDL issued intermediary circular No.116 requiring banks to assess

such operations by using stress testing to make necessary adjustments
based on each bank’s risk appetite.

The objective is to control the risk of financial investment through

creation of various committees that made up of qualified individuals
who are able to distinguish different types of risks.

The Central Bank emphasized on stress testing scenarios that clearly

identify the various market risks: foreign currency, bond risk, stock risk
as well as other financial related risks
Corporate Governance
 BDL issued basic circular No.103 requiring certain qualifications and
certificates for some key positions in banks and financial institutions.
 BDL issued basic circular No.122 that defines rules for the rotation of
external auditors
 BDL issued basic circular No.106 that defines the principles of
corporate governance in the financial and banking sector according to
Basel Committee requirements.

The Basel Committee on banking supervision is a committee of banking

supervisory authorities which was established by the central bank
governors of the group of ten countries in 1975.

The committee guidance assists banking supervisors and provides a

reference point for promoting the adoption of sound corporate
governance practices by banking organizations in their countries. The
principles also serve as reference point for the banks own corporate
governance efforts.
THANK YOU !