As economic activity grinds to a halt in the shadow of the coronavirus, a furious squabble between Israel’s banks and the Finance Ministry is threatening to stymie a plan that aims to get vital credit to small and medium-sized business owners to tide them over though the crunch.
Customers, businesses and parliament members are accusing the banks of greed as they see lenders raise rates on new loans and mortgages at a time when credit is in huge demand.
The banks, for their part, are accusing the government of not doing enough to share the burden of higher risks at a time when no one is certain who will be able to repay loans, and when. The higher risks will end up endangering the customers’ savings, they warn.
Meanwhile, businesses in dire need of credit are not getting it, and the government is being accused of not digging deep enough into its coffers and banks are being accused of not stepping up to help in times of need.
What’s supposed to happen
To understand all of this, though, let’s take a step back.
As citizens globally, and in Israel, struggle with containing the coronavirus, people are losing their jobs and uncertainty hangs over the future of businesses. Thus nations are setting out rescue packages to salvage their devastated economies.
The coronavirus had claimed the lives of 60 people in Israel as of midday Tuesday, with over 9,000 people confirmed to be carriers of the virus.
Israel announced last month an economic rescue package worth NIS 80 billion (approximately $22.4 billion), the largest in Israeli history, to prop up its economy as unemployment surged to record levels of some 25% from a record low of 3.6% pre-coronavirus. This rescue package was later upped to NIS 90 billion.
Part of the rescue package includes a fund –- a so-called coronavirus fund — earmarked for small and medium-sized businesses. These businesses are the engine that keep economies chugging, but are the most vulnerable to social distancing policies and quarantines that see the shuttering of stores with the aim of keeping citizens alive and the health systems from crashing.
The fund consists of NIS 8 billion that will be made available to businesses via the banks, and will be backed by government guarantees.
The loans will be given to businesses with an annual turnover of up to NIS 400 million that have been hit by the corona-crisis. There will be no interest on these loans in the first year, and a charge of prime rate plus 1.5% for the other years — better than market terms. The loans will be for a period of five years. Applications will be processed by the banks within seven days, the Finance Ministry, in charge of the scheme, promised.
According to estimates published on TheMarker financial website, there are some 300,000 businesses in Israel that meet this criterion.
Loans given out from the fund will benefit from government guarantees of 85% per loan, but the guarantees are limited to 15% of overall losses on the total loans given out under the program. This means that if a loan defaults, banks will get back 85% of that loan. But if a whole ton of loans default, banks will get back from the government just 15% of the total amount of defaults.
As the coronavirus hit, the Bank of Israel instructed banks in March to keep credit lines open and to continue to ensure the flow of funds to customers.
It is essential the banking system continue to inject credit into the economy and to support the ability of businesses and households to overcome the crisis, Hedva Ber, the supervisor of banks, and Amir Yaron, the governor of the Bank of Israel, emphasized earlier this month.
The coronavirus crisis has hit at a time when the banking system is solid, benefiting from both capital and liquidity. Banks are a major provider of credit to the Israeli economy, and an almost exclusive provider of credit for households and small businesses, the Bank of Israel officials said.
To make sure the banks continue their lending activities, even amid the higher risk with unemployment levels surging, the central bank lowered the capital requirements lenders must have in their coffers — a ratio of equity as a percentage of risk-weighted assets — to enable the system to increase credit to the economy.
The central bank also eased regulations to allow banks to enable customers to postpone loan repayments, and announced a NIS 50 billion purchase of bonds to provide liquidity to the market.
What’s actually been happening
Even so, customers who turned to banks for new mortgages or loans found that rates had been hiked, applications for credit were not being processed fast enough, and requests were being turned down.
As a gesture to customers, banks “are deferring mortgage payments, but are charging compounded interest,” said Yaron Zelekha, Israel’s former accountant general and today the director of accountancy studies at the Ono Academic College. He called their behavior “piggish.”
Banks have also raised interest rates for households and small businesses that applied for loans at this time, he said, and, “worst of all,” he added, they use the coronavirus fund to “give credit only to those businesses from which they are sure to profit.
“They are not prepared to take a minimal risk on other businesses,” Zelekha said. “In this way they are torpedoing the economic policy of the government at a time of national crisis,” when everyone from doctors to supermarket workers and delivery people were chipping in.
Banks were one of the first organizations to get help in the crisis — “a huge amount of help,” Zelekha said in a phone interview. On the one hand, they benefited from an easing of capital adequacy requirements, which significantly boosts their market values. On the other hand, the fact that they can make state-guaranteed funds available to customers and businesses opens up “new sources of income” they may not have had otherwise, he said.
The point of the coronavirus fund and the easing of terms was to have the public benefit directly, Zelekha emphasized. “But in practice, what banks do? Nothing,” because they are shunning the risks involved.
“Imagine Red Cross workers saying Sorry, I am not prepared to take a risk, I’ll stay in quarantine at home. Or doctors and nurses in intensive care saying we are not ventilating those who are sick, we could get infected. Credit is the oxygen of businesses,” he said.
Banks should start dishing out the credit, and if the risks are indeed too high, then they should talk to the government, Zelekha said. But the lenders took the goodies — the reduction in capital requirements and the fund guarantees — and are not holding up their end of the bargain.
“They didn’t say sorry, the risk is too high, I don’t plan to give credit — I don’t need lower capital requirements, take them back. This is piggishness. To take and not give back is piggish behavior,” Zelekha said. The banks should have said, “I won’t give, but I also won’t take.”
Since the beginning of March, the Israeli government has instituted increasingly severe measures in an effort to contain the spread of the deadly novel coronavirus. Israelis have been ordered to stay at home, only allowed out for essential needs. Those who can work from home are able to continue to do so, but many of those who cannot and are not employed in essential jobs have been placed on unpaid leave. As the economy has slowed down, jobless figures for the first time ever spiked past 1,000,000 at the beginning of the month, bringing the unemployment rate to an unprecedented 25%.
“The banks at this time must show solidarity and find all ways to help businesses survive this period,” said Roee Cohen, the president of the Israel Federation of Small Business Organizations. Attempts to increase the costs of credit and further burden businesses will be a “double-edged sword, because, in the end, banks depend on the business sector.”
Incensed parliamentarians have called on the banks to step up their game in this time of need and curb their greed, in light of a rise in interest on loans and mortgages by some 0.5% to 1%, they said.
“We see the behavior of the banks in Israel at this time with great severity,” the parliament members wrote in the letter addressed to bank CEOs, the Supervisor of Banks, the Governor of the Bank of Israel and the Knesset Finance Committee. As the entire Israeli economy is “keeling under the burden of the crisis,” with the number of unemployed crossing the million mark, hundreds of thousands of businesses crumbling and the self-employed facing crushing losses, “banks are turning to making more profits at the expense of their customers, who are actually the public in Israel.”
In the letter, dated April 5, they called for the banks regulator to “instruct” them to do everything possible to lower interest rates and not charge added rates.
They also called for an immediate reduction of interest rates on loans and mortgages, and a freeze of credit ratings on customers from March 1 until further notifice. They said banks should immediately announce that they will put 10% of all their profits from the second quarter of 2020 until the end of 2021 into a special fund dedicated to customers in need of help in meeting loan and mortgage repayments.
The parliamentarians opined that Israeli banking officials should take a wage cut in solidarity with their customers and pour that money into the special fund as well.
The Israeli government bailed out the banks and nationalized them in their time of need, using taxpayers’ money, after their stocks crashed in the 1983 bank stock crisis, due to the banks artificially propping up their share prices. The banks have been privatized again, since.
The CEOs of the nation’s two largest banks, Bank Hapoalim and Bank Leumi Le-Israel, Dov Kotler and Hanan Friedman, earn an annual salary of some NIS 2.5 million, ($700,000) after Israel in 2016 passed a law capping executive compensation in financial institutions, including banks and insurance firms, at that level, or no more than 44 times the net salary of the lowest worker in the company. Before the cap, top CEO banking salaries reached as much as 8 million shekels a year.
Not their fault
The banks, for their part, fault the government for not digging deeper into its coffers to provide more security for the lenders, who are facing a greater risk of customer defaults at this time of crisis.
Interest rates are up because the cost of raising money globally has risen, as credit spreads between bank bonds and government bonds have widened, making it more expensive for corporations and banks to borrow, and due to the higher economic risks caused by the health policies set in place to combat the coronavirus.
There are today some one million unemployed people in Israel, said Tibi Rabinovici, director for public affairs at the Association of Banks in Israel, whose members include Israeli banks and foreign banks operating in Israel. “Some will get their jobs back, but not all. And even those who are working today are at higher risk, because their jobs are not safe. The whole job market is changing. Thus, the risk premium of our clients has risen. This, together with the rise in the cost of raising money, causes interest rates to rise.”
The money guaranteed by the government is not new money, he explained. The funds will come from the banks, with the government providing guarantees for 15% of the overall losses on the total loans given out under the program.
“The government is actually not putting its hand in its pocket,” Rabinovici said. If the amount of defaults goes over 15% – then there are no guarantees.”
The banks, he said, have been overwhelmed by the huge demand for loans and are struggling to process all of them. Indeed, according to data provided by the Finance Ministry on Monday, the banks have received over 30,000 requests to the coronavirus fund in just five days.
“One bank got in one day the number of requests it generally gets in four years,” Rabinovici said.
The coronavirus fund, as structured, will not be able to provide a “a real response” to the distress of the business sector in general and certainly not for small and medium-sized businesses, the Association of Banks said in a letter to the Finance Ministry’s director general Shai Babad on April 5.
Real assistance to this sector requires the allocation of more money and “much higher” state guarantees, while giving enough time — and not just seven days as required — to enable the banks to make informed decisions on the incoming applications for credit.
“In the present reality, not only does this fund have no meaningful impact on the business sector, it creates false expectations, disappointment and false hope in the public,” the association said in the letter.
“The interest of the banking system is to safeguard the stability of the business sector, including small businesses. These are our customers, and we are committed to helping them, including during this crisis. However, this burden cannot fall on the shoulders of the banking system alone and requires substantial assistance of the government in a similar way that is provided in other countries.”
The guarantees provided by the government, compared to what other countries are providing, are minimal, Rabinovici said. The 15% in guarantees offered by Israel compares with 90% provided by the German government, 85% provided by Switzerland, and 80% by Spain, data compiled by the Bank of Israel shows.
On Monday, the Bank of Israel said that Israel’s GDP contracted by 5% in the first quarter of 2020, and 5% negative growth is predicted for the next quarter as well. Debt-to-GDP ratio was predicted to reach 75% in 2020.
The central bank said that if Israel starts to roll back restrictions by late June, the economy will likely rebound and see growth in 2021. However, it predicted that will take until late 2021 for unemployment numbers to return to its pre-crisis level of around 3.3%.
According to figures released Sunday by the Israel National Employment Service, there are currently 1,050,000 unemployed people in the country. Since the beginning of March, some 887,283 people registered for unemployment benefits, of whom 89% are on unpaid leave, the Service said.
“You can’t expect the banks to take a significant portion of the credit risk on new loans, as they are now probably dealing with issues with many of their existing loans to corporates and households, as the economy has been effectively shut down,” said Terence Klingman, chief investment officer at the Heritage Family Office Partners Ltd., which advises wealthy families on where to invest their funds. Klingman is also a former head of sell-side research at Psagot Investment House, where he covered Israeli banks.
The situation on the ground, Klingman said, where uncertainty reigns over when businesses will be allowed to operate again, whether there will be a second wave of the virus, and how many of the unemployed will be offered their jobs back, “are not things that can be put into into a regular credit model,” he said.
Meanwhile, the Finance Ministry’s director general Babad has threatened to get the banks supervisor to impose sanctions if the lenders don’t step up their game. And the supervisor of banks, Ber, reiterated her expectation that lenders “continue to provide credit to borrowers in this period,” with an emphasis on small and medium-sized business borrowers and households.
The idea is to avoid “toughening of unnecessary underwriting conditions,” she said in a letter to bank heads on April 2. “When you price your credit at this time, there is room for a holistic, long-term economic perspective that takes into account the needs of the economy and customers, even if this will hurt the profit margins of the banking system in the short term.”
Meanwhile, the situation on the ground is in flux: banks representatives on Monday met with Finance Ministry officials to see how they could iron out differences, and on the same day the Bank of Israel slashed its interest rates, adding it would put a new monetary instrument into operation: the provision of monetary loans to banks for a term of 3 years, with a fixed interest rate of 0.1 percent. The loans are contingent on extending credit to small and micro businesses.
Bank Hapoalim, Israel’s largest bank by market capital, and the Israel Federation of Small Business Organizations on Monday said they had set up a half-a-billion shekel fund to provide immediate credit, starting Tuesday, for people who are self-employed at rates similar to those set by the coronavirus fund.
Cohen, the president of the Small Businesses Organization, said the initiative was a step in the right direction and he hoped other banks would follow suit.
He pointed an accusing finger at the government for not stepping in “under the stretcher” to do its bit for the economy.
The government should not expect others “to do their job for them,” he said in the phone interview. The greater the guarantees given to banks, he said, the greater the credit they will provide. “At the moment the state is not giving banks what they need,” Cohen said. “The state has to put down a safety network for the banking system that is far bigger, so they will have the tools to help businesses.”