(Adds comment from banks association)
By Tom Arnold
BEIRUT, Nov 6 (Reuters) - Lebanon's banks are worried that a central bank deadline for compulsory capital increases is too tight as they grapple with the fallout from weeks of anti-government protests, banking sources familiar with the matter said.
They said it was possible lenders might ask the banking regulator for an extension to the requirement to raise their Common Equity Tier 1 capital, a key measure of financial strength, by 10% through cash injections by the end of the year.
The central bank did not respond to a request for comment.
Banks had in the past proven their capability to raise capital and attract deposits when needed, said Salim Sfeir, chairman of the Association of Banks in Lebanon, which represents more than 60 banks.
"However, this is contingent to the political stability in the country," he said in a written response to questions from Reuters.
"The governor of the central bank knows the status and the challenges facing our banks and has always been willing to accommodate the interests of the sector and the needs of the monetary and financial stability in the country."
In a move aimed at strengthening banks' ability to withstand pressures caused by Lebanon's political and economic crisis, the central bank told lenders on Monday the increase was compulsory, along with another 10% increase by June 30, 2020.
The central bank circular also ordered lenders not to distribute dividends for the 2019 financial year.
Banks reopened on Friday after two weeks of closures during mass demonstrations that toppled Prime Minister Saad al-Hariri's government but lenders have now imposed restrictions on credit lines and some overseas transfers, sources say.
The measures are designed to alleviate concerns about a liquidity squeeze on a sector already facing its most severe test in nearly 30 years after a slowdown in the capital inflows needed to finance Lebanon's high twin deficits and public debt.
One of the sources said the 2019 capital increase deadline was challenging for a handful of banks that are listed and have large numbers of shareholders. Common Equity Tier 1 is made up mainly of common shares and retained earnings.
In a reflection of the added pressures facing Lebanese banks, Fitch Ratings last week downgraded Bank Audi and Byblos Bank to CCC-, the fourth-lowest possible rating.
The ratings agency also warned that the government's ability to support banks could not be relied upon given the country's low sovereign credit rating.
Moody's Investors Service on Tuesday downgraded Lebanon's rating to Caa2, citing the increased likelihood of a debt rescheduling that the ratings agency would classify as a default.
Although he was not aware of any concerns about the deadline for implementing the requirements, economist Freddie Baz said it was "quite a material requirement".
"Its too early to assess how feasible it will be," said Baz, a former Bank Audi executive. "This will have to be raised in U.S. dollars and if you look at banks' shareholder base, a big chunk of the money will have to come from abroad.
"I doubt its compulsory and shareholders that don't want to contribute can have their equity diluted."
Additional reporting by Ellen Francis in Beirut; Editing by David Clarke and Alison Williams