My experience at the Bank of Lebanon

December 14, 2021 by Jade RAKHA

My experience at the Bank of Lebanon

In this article, Jade RAKHA (ESSEC Business School, Bachelor of Business Administration, 2021) shares with us his experience at Banque Du Liban.

Banque Du Liban

Before the Central Bank of Lebanon was established in 1963, the Bank of Syria and Lebanon had the role of the central bank. For a period of 25 years, this commercial bank had the privilege of issuing the Lebanese currency.

All of the Central Bank’s expenses are paid by the government. However, 20% of its net profit is allocated to its general reserve, while the rest (80%) is for the state treasury. It is exempt from all duties and taxes and is not subject to the bankruptcy rules specified in the Trade Law applicable to banks. Nevertheless, the Central Bank is subject to the Trade Law in its relationship with third parties, it should conduct its operations and organize its accounts under commercial and banking rules.

Banque du Liban

The head office of the bank is divided into 19 directorates and 10 units. The Central Bank of Lebanon has 9 branches in different regions of Lebanon. The bodies established by the Central Bank are Supervisory Board, Special Investigation Commission, Higher Banking Authority, Capital Markets Authority, and MidClear.

The Central Bank has the power to issue regulations and to impose administrative penalties on all institutions under its control. It issues the appropriate regulatory texts to achieve its objectives. It has a special legal personality and administrative independence from the state. Its employees shall be appointed in accordance with the special law system specific to the institution and shall be subject to the Labor Law.

Moreover, the Central Bank of Lebanon enjoys financial independence, but with certain limits: all of its decisions should be approved by the Government’s commissioner, and the Governor shall submit balance sheets and operations reports yearly, to the Minister of Finance.

The Governor and his four deputies shall be appointed by a decree issued by the Council of Ministers upon the proposal of the Minister of Finance, every 6 years. They are obliged to work full-time throughout their tenure. The Governor has the widest powers to administer and operate the Central Bank of Lebanon. He is the legitimate representative of the Bank and signs all contracts and agreements. Concerning the Deputies of the Governor, they have no specific powers, but the Governor may appoint them tasks. In the event of the vacancy of the post of Governor, the First Governor shall assume office pending the appointment of an attractive governor. Such functions shall be assumed by the Second Deputy Governor in the absence of the First Deputy Governor.

The Central Council consists of seven members: The Governor as President, the four Deputy Governors, the Director General of the Ministry of Finance, and the Director General of the Ministry of Economy and Trade. It should be noted that the Director General of the Ministry of Finance and the Director General of the Ministry of Economy and Trade are not present as representatives of the Government but are present as themselves, which confirms the independence of the Central Bank of Lebanon in its decisions.

The Central Council has wide powers, since it determines monetary and credit policies, fixes the discount rate and interest rate of the bank’s loans, establishes regulations relating to bank operations, approves the balance sheet of the Central Bank’s expenses, and approves the establishment of banks and all private institutions to supervise the Central Bank of Lebanon.

As mentioned before, the Central Bank has the privilege of issuing the national currency. This privilege has been delegated to the Central Bank, which carries out this task exclusively under strict conditions and rules. The Money and Credit Law defines certain characteristics of the Lebanese currency but it has given the Central Bank the freedom to decide the size, texts, fees and other features of banknotes and coins.

To maintain the integrity of the banking system, the Central Bank of Lebanon takes all measures it deems appropriate to maintain the harmony between bank liquidity and the volume of credit in banks. Thus, it gives recommendations and uses the means that will ensure the conduct of sound banking work. This institution also acts as an adviser to the government, proposes measures it considers necessary for the economic sector and warns the government of operations it considers harmful.

My internship at Banque Du Liban

During this internship, I did not have any missions to do because it was not a practical internship, but more of a theoretical one: each day we had one speaker that came and presented the department in which he or she worked in so that we know the main tasks and roles the central bank has. I will not present all the departments of Banque Du Liban because that would take a lot of time even if it is very interesting. I’ll present some departments that are related to the financial sector and to the material that we tackle in the SimTrade course.

Directorate of Financial Operations

The general mission of the Central Bank of Lebanon, as stipulated in Article 70 of the Monetary and Credit Law, is to preserve the cash to secure the basis for lasting economic and social growth, including:

Maintaining the integrity of the Lebanese currency
Maintaining economic stability
Maintaining the integrity of the banking system
Developing the monetary and financial market
Developing and organizing payment systems and tools
Developing and organizing money transfer operations including electronic transfers
Developing and organizing clearing and settlement of financial instruments, payment and trading bonds.

Thus, the Central Bank of Lebanon is responsible for monetary management in light of economic and political developments, securing liquidity for the banking and financial system, and it is the last resort to lending banks.

Most of these goals are under the responsibility of the Directorate of Financial Operations at the Central Bank of Lebanon, in charge of leading Macroeconomic policies. It is at the helm of the Economic Legislation, as well as the Fiscal and Monetary policies. Being in charge of Fiscal policy means that this department should prepare the general budget, collect taxes, give tax incentive… As for the Monetary policy, it should maintain the integrity of cash as well as low inflation rates.

The Directorate of Financial Operations determines interest at the level of the financial market. It can define either the size of cash or interest on cash. This department can also influence prices in the financial market by affecting the level of the money supply. If it wants to reduce the interest rate in the market, it increases the amount of cash (increase the money supply). Vice versa, if it aims to raise the price of money in the market, it reduces the amount of cash (reduction of the money supply).

The Special Investigation Commission (SIC)

The Special Investigation Commission is in charge of Financial Regulation and Supervision, more specifically fighting Money Laundering and Terrorism Financing. It is composed of: The Governor of the Central Bank of Lebanon as President, a member of the Council of Ministers, the Chairman of the Banking Supervision Committee or any of its members, the Appointed Judge of the Higher Banking Commission or an alternative judge.

The Financial Intelligence Unit (FIU) is a national central unit responsible for receiving, requesting, analyzing and providing the relevant authorities with financial and other information concerning possible cases of money laundering and terrorism financing.

According to the SIC, Money Laundering is defined as “any act or attempt to conceal a source of funds or assets resulting from a criminal act”. The goal of money laundering is turning junk money into clean money. The different stages are placement, layering, and integration. This process has a lot of consequences: it increases the rate of crimes, it leads to the instability of the economy, it weakens the integrity of financial institutions as well as the social and economic structure.

The definition of Terrorism Financing according to the SIC is “financial support, in any form, for terrorism and those who encourage, plan or participate in it”. It aims to raise and secure funds for terrorism. The stages of financing terrorism are the collection, transmission, and use.

The mission of the Special Investigation Commission is to receive notifications and requests for assistance, conduct investigations into suspected money laundering or terrorist financing offences, determine the seriousness of evidence, and take the appropriate decision.

The Foreign Exchange & International Operations Department

The Foreign Exchange & International Operations Department is divided into 5 different divisions:

The Transfer Division
The Documentary Credit Division
The Back Office
The Clearing Room
The Communication Division.

There are different types of traders, like Forex Traders, Money Market Trader, Capital Market Trader, Commodities Traders, Derivative Traders…

The Forex market is the simultaneous buying of one currency and selling another. During our stay at the Central Bank of Lebanon, we got the chance to stimulate this process with Mr. Patrick el Hajj. This market has more buyers and sellers and daily volume than any other market in the world and takes place in major financial institution across the globe (daily turnover is about $5 Trillion). All information on Foreign Exchange can be found on a system called Bloomberg.

Financial Assets Authority

The Financial Assets Authority consists of two main sections: The Recruitment Section and the Contributions Section. The Recruitment Section should prepare daily reports on the Bank’s foreign currency reserves, sources and uses and monitors interest rates and amounts paid, and follow-up financial markets and global interest and study their effects on the bank’s investments. The Contributions Section is responsible for studying the financial situation of companies in which the Bank of Lebanon contributes or in which it represents the Lebanese state through general assemblies and monitoring reports, and preparing any reports or studies related to contributions requested by the Governor or the Central Council that may reach the Investor Information Statement (Prospectus).

The majority of the subjects mentioned in the session at the Central Bank of Lebanon were new to me, so I can clearly say that I gained a lot of knowledge from this experience and got access to information that can only be obtained from experts in the fields. I got the chance to get into the details of each department in the Central Bank, gaining knowledge of how it is divided, and how it works.

Personally, I gained a lot from this training. However, I admit I was expecting more work on the field than just theoretical sessions, and thus gaining more experience rather than knowledge. However, we had the spread of COVID-19 and the current economic situation in the country did not give us the chance to be able to visit the Central Bank and see how each department operates on a daily basis on the field.

Most speakers gave us great sessions and were able to convey their message properly. Nevertheless, if the schedule was a bit more appropriate, I believe we would have had a better experience.

Useful Resources

Banque du Liban

About the author

The article was written in December 2021 by Jade RAKHA (ESSEC Business School, Bachelor of Business Administration, 2021).

My experience as a portfolio manager in a central bank

November 29, 2020 by Youssef LOURAOUI

My experience as a portfolio manager in a central bank

During my studies at ESSEC Business School, I had the chance to attend the SimTrade course. This course helped me to secure an internship as a risk manager at Bank Al-Maghrib (the central bank of Morocco) as I was asked during my interviews technical questions about financial markets that were covered during the course.

In this article, Youssef LOURAOUI (ESSEC Business School, Global Bachelor of Business Administration, 2020) shares his experience as an intern in the risk management department (middle office) at the Central Bank of Morocco (Bank Al-Maghrib) in 2020.

Bank Al-Maghrib

The central bank of Morocco was founded in 1959 after Morocco proclaimed its independence. It is a 100% state-owned bank that regulates the markets and the economy by implementing monetary and economic policies to ensure the welfare in terms of the parity of prices and the control of inflation. Inflation is a major economic indicator that possesses strategic importance and is part of the major focus for the central bank.

Bank Al-Maghrib

I describe below my experience at Bank Al-Maghrib.

My internship at Bank Al-Maghrib

I was affected at the middle office department, which is in charge of measuring risk exposures and profits and losses on the positions taken by the bank on an investment portfolio of 27,4 billion euros of foreign reserve. One of the key risk exposure metrics is volatility measured by the standard deviation statistically defined as the dispersion of a random variable (asset prices or returns in my case) from its expected value. The standard deviation indicates how much the current return is deviating from its expected historical returns. It is one of the most widely used metrics for investors when analyzing the risk of an investment. Among other key exposures metric, there is what it is called the VaR (Value at Risk) at 99% and a 95% confidence level for 1-day and 30-day positions. In other words, the VaR is a metric used to compute how much loss can the portfolio incur at a % degree of confidence for a given time horizon.

Every day, the Head of the Middle Office organizes a general meeting where he talks about global debriefing of the main financial news that happened overnight and debriefing the middle office desk for the “watch out” assets that could have a potential investment opportunity. Accordingly, the team has also the task of staying in line with the investment decision that characterizes the organization, as it does not operate as an investment banking corporation nor a hedge fund in the risk and leverage used. As the central bank has the special task of keeping safe the national reserve and searching for a good mix to invest in a low risk asset (AAA bonds from European countries coupled with American treasury bonds).

My task aimed to get a hand on the investment mechanism in the middle office of the bank. The investment mechanism consists of the division of the overall portfolio into three main tranches where each one has its characteristics. The first tranche (called also the security tranche) is calculated by analyzing the national need for a currency that needs to be kept safe to establish welfare on the exchange market (based mainly on short term position in low-risk profile asset (Liquid and high rated bonds). The second tranche is based on buy and hold and a market strategy. The first one consists of taking a long position on more risky assets than the first tranche till maturity, there is no selling during the lifetime of the asset (riskier bonds and gold). The second strategy is based on buying and selling liquid assets for an expectation of yielding higher returns.

During my time at the middle office desk, I’ve managed to develop a tool to represent the investment mechanism used for asset allocation. The tool, developed in an Excel spreadsheet, is an intuitive and simplified model that enables the understanding of the investment mechanism. Indeed, it is capable of continuously refreshing the data by importing the most recent quotations (from data providers like Bloomberg or Reuters as the two main financial data providers) to allow for an update of the different exposures and thus allow to respect the proportions of portfolio allocations. It has also a dynamic risk management tool to effectively compute draw-downs (a peak-to-trough decline during a specific period for an investment) and stressed conditions, as I experienced how the markets reacted to the novel Covid-19 pandemic with one of the most historic market movements in a long time.

Some of the key learning outcomes:

The introduction to data analysis by manipulating large datasets

Portfolio optimization based on the Markowitz efficient frontier

Dynamic portfolio allocation based on the fundamentals of the modern portfolio theory

The theory of efficient markets to understand how the markets evolve and move in a different direction as a reaction to events.

Front office, middle office and back office

My internship was also a good opportunity to discover the different departments of the bank: the front office, the middle office, and the back office:

The front office directly deals with the individual or corporate clients of the bank. Salespeople propose adequate products and solutions to the clients (they are in front of them!). Traders intervene in the financial markets on behalf of the clients or for the bank itself (proprietary trading). To answer the demand of clients, financial engineers and quants also develop new products and the associated mathematical models to price them. One of the main trends that are emerging in the front office is the automatization with the help of AI and algorithmic trading that is taken some room in the trading desks. At this time the bank didn’t implement any technology based on high-frequency trading, but it is taking the financial industry by surprise and it goes a long way back, nearly decades ago since the first usage of algorithmic trading.

The middle office situated between the front office and the back office (somewhere in the middle!) deals with the risk management of the bank. Risk managers control the traders’ positions (respect of constraints such as value-at-risk limits and stress tests) and compute the profits and losses (P&L) on traders’ positions daily.

The back-office deals with the conformity and the security check of every trade to ensure a proper settlement.

Note that the frontiers between the front, middle, and back-office may change from one bank to another. And last but not the least, the IT people are also supporting all three departments to make the whole system work. In other words, they are in charge of the maintenance of the technical infrastructure that the bank uses daily to operate fluently, as all the departments are dependent on internal software to intermediate and operate in the market or to communicate between each department of the bank or with another organization. The IT desk has great importance in offering a flawless experience for the employees when using the internal electronic infrastructure. There is the backbone of the bank skeleton.

All in all, the SimTrade module served me well as I managed to gain quickly the necessary knowledge and bridge the gap that I had to be in the best position to achieve the missions I’ve been affected. I especially used the content of Period 2 of the SimTrade certificate, which deals with market information. The concepts of trading and investing were also obviously useful for the development of my portfolio management tools.

Useful resources

Bank of Morocco

About the author

The article was written in November 2020 by Youssef LOURAOUI (ESSEC Business School, Global Bachelor of Business Administration, 2020).