الحياري الإقتصادي اقتصاد سهل يفهمه الجميع
The Lebanese banking crisis by the numbers is shocking: Depositors had an estimated $90 billion of Lebanese depositors’ money frozen, while an additional $50 billion lost through the catastrophic devaluation of the Lebanese Pound. In 2019, the exchange rate of 1 USD to the Lebanese Pound (LBP) averaged around 1,500 LBP, whereas today it is 89,700 LBP, as the Lira plummeted by over 98% (60x).
Yet, despite this wholesale financial destruction, it remains that not a single major Lebanese bank has officially declared bankruptcy.
This paradox isn’t just a grim irony; it’s a stark, painful lesson in the fundamental — and often misunderstood — reality of how banks operate and how money is truly created.
Lebanon’s first-ever Sovereign Default
Lebanon’s crisis stemmed from years of unsustainable government spending financed by attracting foreign currency deposits with high interest rates. This “financial engineering” masked a dangerous reality: banks were heavily exposed to government debt.
The house of cards began to fall in October 2019 when widespread protests against a proposed WhatsApp tax sparked a crisis of confidence. Faced with a looming bank run, banks imposed informal capital controls, restricting access to funds. The banking crisis was triggered in March 2020 when Lebanon defaulted on a $1.2 billion Eurobond payment – its first-ever sovereign default. This was just one payment of Lebanon’s much larger public debt debt estimated to be around $90 billion, or 170% of its GDP.
This default confirmed the government’s insolvency, leaving commercial banks, heavily invested in government debt, technically insolvent themselves. Instead of formal bankruptcy, banks implemented drastic measures: restricting withdrawals, forcing dollar conversions into the rapidly devaluing Lebanese Pound, and essentially trapping depositors’ money.
Your Bank’s “Deposit” is not a Deposit, but rather a Loan to the Bank
The Lebanese crisis exposed a common misconception on how banks operate: When people rushed to withdraw their “deposits,” the banks simply couldn’t meet the demand. Why? Because the money wasn’t sitting there in deposits. The banks had already “lent” that money into existence for others, or invested it in ways that were now illiquid or impaired (like government bonds).
This brings us to the crucial legal reality:
Deposits are loans to the bank: When you put money into your bank account, you are, legally speaking, lending that money to the bank. You become an unsecured creditor. The bank owes you that amount. It’s not “your money” being held by them, rather: it’s money the bank now owns, and they have a debt to you.
The Bank Owns the Money, Not You! The money in your account is a claim you have against the bank. In a healthy banking system, this claim is easily honored. In a system under stress, like Lebanon’s, that claim can become incredibly difficult, if not impossible, to enforce.
The Lebanese people were not trying to get their money back from a vault, but rather: they were trying to get banks to repay the loans they had made to them. And when banks couldn’t repay those loans, the system froze.
The Lebanese crisis is a tragic testament to what happens when the illusion of banking clashes with reality. It’s a global wake-up call to grasp the true nature of money and the pivotal role banks play in its creation — and its potential disappearance.
Three Theories of Banking, conclusion:
FALSE: Financial Intermediation Theory: Banks gather deposits and lend them out after analyzing borrowers
FALSE: Fractional Reserve Theory: While individual banks act as intermediaries, the banking system collectively creates money through a diffuse process
TRUE: Credit Creation Theory: Banks do not lend out deposits; instead, they create new money when they issue loans. This happens individually at each bank.
Use any bank at your own risk!
