The Banking Executive Magazine - July Issue 2021

Evolution of the Lebanese Banking Sector Legitimacy and are of particular importance for the Lebanese banking sector to com- ply with for various reasons: the country’s dollarized economy, the need of the Lebanese banks to main- tain correspondent relationships with their US counterparts in order to transact on the international level, and the “exorbitant privilege” of the US to enforce compliance with its regulations beyond its borders. The consequences of non-compli- ance with the US regulations could be disastrous and may expose violat- ing banks to reputational damage, fi- nancial penalties, and ban from access to the US financial system. This may also affect the sector’s legit- imacy which could be questioned or even stigmatized in case of violation. GIVEN THE INCREASED challenges of the US regulations, Lebanese banks continuously seek a legitimacy that is conferred by the US, especially after the collapse of the Lebanese Canadian Bank (LCB) and Jammal Trust Bank (JTB) which were shut down due to violation of US, igniting the initial red flag to- wards a legitimacy downfall for the entire Lebanese banking sector. RUDE AWAKENING When such scandals or crises hit an organization or a financial institu- tion, the latter is seen by the social actors as illegitimate and become more exposed to comments and at- tacks. Such scandals or crises do not only impair the legitimacy of organi- zations that have been involved in the disruption or that are subject to the scandal, but also affect the legit- imacy of other organizations in the same organizational field. In this respect, the legitimacy of the Lebanese banking sector was to a certain extent taken-for-granted be- cause it is hard to conceive a society without a banking system. However, it is not to be assumed that this legit- imacy could never be lost or ques- tioned although it might seem to be quite unshakable at certain points in time. All of a sudden, further to an additional scandal, an organization or a bank could reach some kind of a sector wide “cliff” in its legitimacy and become illegitimate. In the case of Lebanon, the legiti- macy of the entire banking sector was weakened by independent cases and then shaken to its core following the events sparked by the revolution of October 17th 2019, where civilian demonstrators took to the streets ac- cusing the entire political and finan- cial systems of corruption and collusion. THE LEGITIMACY CRISIS Commonly, organizations opt for le- gitimacy-seeking strategies to re- spond to institutional pressures and maintain their legitimacy. Till now, Mr. Nassar’s research found that the Lebanese banking sector choices for strategic responses were limited only to appease the exogenous pressures of the United States. RESULTS REVEALED THE SALIENCE OF THREE TACTICS WHICH STEMMED RIGHT AFTER THE LCB CRISIS: 1.“over-compliance” where banks went beyond what is required by the US regulations. 2.“de-risking” where banks cut off relationships with customers and businesses perceived as high risk and which could affect their rela- tions with their US counterparts, 3.“lobbying” where banks engaged in open dialogue with the US com- petent authorities in order to de- fend their legitimacy. In essence, the sector became inter- est-driven in its choice of strategic re- sponses, not because of any direct benefit, material outcome, or organi- zational efficiency, but merely be- cause it was seeking legitimacy from a major institutional actor, a tactical maneuvering that defies the theoret- ical applications and researcher rec- ommendations for what institutions should adopt to gain long lasting le- gitimacy. ISSUE 151 JULY 2021 the BANKING EXECUTIVE 11 AUTHOR: DR. DANY NASSAR Dr. Nassar has over 20 years of banking experience, particularly in the Internal Audit and Compliance functions. He is the cur- rent Group Head of Compliance Bank of Beirut. He holds a Doctorate in Business Administration from Paris Dauphine Uni- versity and a Master’s degree in Business Administration (MBA) from Saint Joseph University – in partnership with Paris 1 Pan- theon – Sorbonne University and Paris Dauphine University. Dr. Dany Nassar earned the 2021 first prize for the best doctor- ate granted by the Association Internationale de Management Stratégique (AIMS) in France this month. His research was en- titled “Evolution of the Lebanese Banking Sector Legitimacy: Strategic Responses to Pressures of US Regulations”.