‘Gap Law’ ignites deep divisions
over losses and financial recovery

A Long Political and Legal Battle Ahead

The long-awaited draft Law for Financial Regulation and Deposit Recovery, widely known as the ‘Gap Law’, has reopened fundamental disputes over how the country should deal with the losses from its historic financial collapse, exposing sharp divisions among the government, the Central Bank, international lenders, banks, labor unions, and professional groups.

Approved by simple majority the Council of Ministers more than six years after the onset of the crisis, the draft law seeks to quantify the financial gap in the banking system, allocate losses among stakeholders, restructure banks, and lay the groundwork for restoring confidence in the financial sector. Instead of consensus, however, it has triggered a wave of objections reflecting competing visions of justice, legality, and economic survival.

At the core of the debate is a single question: who should bear the losses of Lebanon’s financial collapse, and in what order?

Government: A Necessary, Imperfect Framework
The government, represented most prominently by Economy and Trade Minister Amer Bisat, one of the law’s architects, presents the draft as an unavoidable step forward after years of paralysis. Bisat has described the law as imperfect but necessary, arguing that the choice is not between the law and an ideal solution, but between the law and continued collapse.

Under the proposed framework, small depositors would receive faster and more predictable access to their funds, while larger depositors would be offered longer-term, Central Bank–backed instruments linked to future cash flows. The law also aims to force banks to either restructure or exit, addressing what officials describe as a “zombie banking” sector and helping reverse Lebanon’s shift toward a cash-based economy that has fueled informality and financial isolation.

The government emphasizes accountability measures, including international-standard audits and asset quality reviews of both the Central Bank (BDL) and commercial banks. Past financial engineering operations, suspicious transfers, and excessive profits would be scrutinized, without precluding criminal or civil proceedings.

According to the government’s estimates, about 85 percent of depositors would be fully repaid over a relatively short period, with all depositors recovering at least the first $100,000 within four years. The state, the government insists, would still be required to contribute through interest-bearing instruments and possible recapitalization of the Central Bank.

Central Bank: A Different Sequencing
Central Bank Governor Karim Souaid has taken a different position, proposing a reversal in the order of loss recognition. His approach would first reduce banks’ liabilities to depositors by excluding or reclassifying what he describes as “irregular claims,” before distributing responsibility among banks, the Central Bank, and the state, and only later addressing shareholder losses.

This sequencing has drawn strong criticism from the International Monetary Fund, which argues that it effectively shifts losses onto depositors before shareholders have absorbed their share, violating the hierarchy of claims and creating moral hazard.

IMF: Hierarchy and International Norms
The IMF’s position is grounded in what it calls non-negotiable international best practices. It insists that a comprehensive audit of the Central Bank must first establish the true size of the financial gap. Commercial banks must then recognize losses on their placements with BDL, and shareholders must absorb losses fully, even if their equity is wiped out.

Only after shareholder equity is exhausted, the IMF argues, should depositor claims be restructured or reduced. At that stage, deposits deemed “irregular,” such as excessive interest payments or suspicious transfers, could be addressed to reduce the overall deposit base.

For the IMF, respecting the hierarchy of claims—shareholders last, depositors senior—is essential to fairness, predictability, and credibility. Banks could then be recapitalized through new investors, shareholder injections, or voluntary debt-to-equity swaps involving large depositors.

Banks: Legal and Constitutional Objections
The Association of Banks (ABL) has emerged as one of the law’s strongest opponents, expressing “fundamental reservations” and warning that the draft threatens both depositors’ rights and the survival of the banking sector.

ABL argues that the law was issued without a serious determination of the size of the financial gap, non-performing assets, or available liquidity. It also accuses the state of evading its obligations to the Central Bank, despite legal requirements for it to cover BDL’s deficits.

The banks contend that the Central Bank holds assets exceeding $70 billion and propose liquidating a limited portion—around $10 billion—to fully repay small depositors, sparing banks and depositors from bearing losses caused by the state and BDL.

They also warn that retroactive measures targeting banks and shareholders will make recapitalization impossible, destroying confidence and correspondent banking relationships. In an unusually stark statement, ABL said the draft law effectively adopts “the logic of liquidating the banking sector and destroying the national economy.”

Economic Bodies: Warning of Economic Paralysis
Lebanon’s Economic Bodies echoed many of the banks’ concerns, warning that the draft law places the burden of the crisis almost entirely on banks and depositors while allowing the state to evade responsibility.

They called for a serious audit of the state, the Central Bank, and banks, followed by a clear acknowledgment of the state’s debts to BDL and limited liquidation of state and Central Bank assets to repay deposits under $100,000, which they say represent more than 84 percent of depositors.

The group warned that damaging the banking sector would paralyze the economy, expand the illicit cash economy, and risk international financial isolation.

Labor Unions and Professionals: Divided Responses
Labor unions, represented by the General Confederation of Labor Unions, welcomed the law as a starting point, praising its protection of small depositors and calling it a transition from crisis management to crisis resolution. However, they stressed that further work is needed to protect larger depositors, including pension and mutual aid funds.

In contrast, a broad coalition of professional syndicates—including doctors, engineers, lawyers, and teachers—rejected the draft outright, denouncing it as a fait accompli that legalizes the confiscation of deposits and absolves the state of responsibility. They warned of strikes and legal action if Parliament adopts the law without fundamental amendments.

A Long political and legal battle ahead
As the draft law heads to Parliament, it is clear that it will face intense scrutiny, amendments, and political bargaining. The debate has underscored that Lebanon’s financial crisis is not merely technical, but deeply political and legal, rooted in competing answers to who should pay for the collapse.

Whether the Gap Law becomes a foundation for recovery or another flashpoint in Lebanon’s prolonged crisis will depend on whether lawmakers can reconcile these conflicting visions—or whether the country remains stuck in a costly and unresolved limbo.