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UPDATE 3-Lebanon c. bank urges banks to recapitalise, repatriate funds

* Big depositors urged to repatriate funds

* Lebanese banks hit by country’s financial crisis

* Banks to provision for losses on Eurobond holdings (Adds comments by central bank governor)

BEIRUT, Aug 27 (Reuters) - Lebanon’s central bank has told domestic banks to recapitalize through new means, urge big depositors to move funds back to the country and provision for a 45% loss on their Eurobond holdings, according to several circulars published on Thursday.

Central Bank Governor Riad Salameh later told Reuters the measures aimed to strengthen the banking system, paralysed by the worst financial crisis in Lebanon’s history which has been compounded by this month’s Beirut port blast and COVID-19.

Domestic banks have frozen savers out of their dollar deposits and largely blocked transfers abroad since late last year due to the economic and financial crisis, which culminated in Lebanon defaulting on its huge foreign currency debt in March, and has ravaged the currency.

One circular told banks to provision for a 1.89% loss on their hard currency deposits with the central bank - but no losses on holdings of Lebanese pound certificates of deposit - as well as a provision for a 45% loss on Eurobond holdings.

The provisions should be in place within five years, but extendable to 10 years with the approval of the central bank.

Lebanon’s banks hold the bulk of the sovereign debt and successive governments have used the banking system to finance the state, which is struggling with an acute dollar shortage.

“We do not know how the negotiations between Lebanon and the creditors will end up but we have taken the normal provision that follows such a default,” Salameh told Reuters.

A financial rescue plan for Lebanon forged by the now-caretaker government floundered amid differences between the outgoing administration, the banking sector and politicians over the size of vast financial losses. The internal row also stalled talks with the International Monetary Fund for a bailout. CAPITAL INCREASE One circular instructed banks to increase their capital by 20% by the end of the year. Salameh said those that cannot do so by the end of February 2021 would have to exit the market.

One option given to banks to raise their capital allows shareholders to transfer ownership of property to their bank on condition it is liquidated within five years.

Another is to provide depositors with an option to convert their deposits into shares in their bank’s capital or into “redeemable, tradeable and convertible perpetual bonds”.

Banks should also urge depositors who transferred more than $500,000 abroad as of July 1, 2017, to deposit funds in a special account in Lebanon that will be frozen for five years and equivalent to 15% of the transferred amount.

The directive applies to bank chiefs and large stakeholders. The equivalent deposit amount is raised to 30% for “politically exposed persons”.

The central bank did not spell out what incentives could be given by banks to encourage depositors to return funds to the banking system, which has imposed strict capital controls.

Salameh said such controls were “necessary” except for external accounts, in an apparent reference to accounts created since late 2019 to receive fresh funds transferred from abroad. ($1 = 1,505.5000 Lebanese pounds) (Reporting by Tom Perry and Raya Jalabi; additional reporting by Nadia El Goweily; Editing by Hugh Lawson and Susan Fenton)