The Impact of Currency Devaluation on Banking Sector Performance: Evidence from Lebanon's Financial Crisis
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In this study I examine the extent to which the collapse of the Lebanese pound's parallel-market exchange rate against the US dollar is statistically associated with the deterioration of Lebanon's banking sector during the 2019-2023 financial crisis. Lebanon's peg to the dollar held for over two decades before collapsing in 2019, and I test whether the magnitude of the resulting devaluation tracks measurable banking-sector outcomes: US-dollar bank deposits, bank return on assets (ROA), and the non-performing loan (NPL) ratio. Using annual secondary data compiled from the World Bank's Global Financial Development Database, IMF Article IV reports, and Lebanese banking-sector bulletins for the years 2017-2023, I estimate log-linear regressions of each performance indicator on the year-end parallel-market exchange rate. The results show a strong, statistically significant negative relationship between the exchange rate and USD bank deposits (r = -0.989, R² = 0.977, p = 0.0015): deposits fell by 25.1% between 2019 and 2023 as the currency lost more than 97% of its parallel-market value over the same span. The relationship between the exchange rate and bank ROA was directionally negative but not statistically significant (r = -0.536, p = 0.352), and NPL data, available only for 2018-2020, moved together with the exchange rate (r = 0.978), though the sample was too small for formal regression. These findings support the “twin crisis” framework, in which currency and banking crises reinforce one another, and demonstrate that Lebanon's devaluation is empirically, not just anecdotally, linked to the erosion of its banking sector. However, small annual sample sizes, a direct consequence of the breakdown in routine banking disclosure after 2019, limit the strength of causal claims, and future research should extend the series and incorporate bank-level, multivariate data once fuller disclosure resumes.
Keywords
Bank Deposits, Banking Sector Performance, Currency Devaluation, Dollarization, Financial Crisis, Lebanon, Non-Performing Loans