Bank of Israel head bashes banks for raking in hefty profits while shortchanging clients
Governor Yaron laments that deposits sitting in checking accounts often do not bear interest for holders, but are a cheap source of financing for lenders
Sharon Wrobel is a tech reporter for The Times of Israel.
Bank of Israel governor Prof. Amir Yaron on Wednesday criticized the country’s lenders for profiting from the income they earn from mortgage and loan repayments while being slow to offer the public fair interest-bearing deposits.
Speaking at a conference in Tel Aviv, Yaron said that lenders, which have been reaping huge profits from high interest rates on mortgage and loan repayments, need to pass on or offer higher rates on deposits held in customers’ checking accounts.
The governor complained that there is a wide gap between what the banks earn on loans and what they pay out for deposits held in checking accounts, as the central bank raised interest rates in recent years.
“There is no doubt that the banking system in Israel is characterized by an insufficient level of competition,” said Yaron.
“The high profitability of banks is largely a result of the significant funds that the public holds in checking accounts, which provide a cheap and stable source of financing for the lenders, while they do not generate a proper interest or return for account holders,” he added.
Israel’s top lenders, including Bank Hapoalim and Bank Leumi, have posted record net profits over the past two years as high interest rates and rising inflation boosted financing income and helped credit and loan operations flourish, while repayment costs for mortgage holders have ballooned, adding to the country’s already high cost of living. Hapoalim saw its third-quarter profit rise 14% fueled by NIS 4.58 billion in net interest income, while Leumi reported a 30% increase in net profit.
Israel’s central bank this week held interest rates at 4.5% for a seventh consecutive time, after steadily hiking the benchmark rate from a record low of 0.1% in April 2022 in order to to cool inflationary pressure. This in turn has allowed banks to raise rates for borrowers and has rapidly increased the costs of mortgage holders.
The country’s banks have come under fire for not fairly passing on or being slow in offering higher interest rates to deposit holders, while quickly adjusting hikes in rates on loans and mortgages. Deposits in checking accounts often do not bear interest for holders, but generate interest income for the banks.
“The public’s trust in the banks is not built only on the confidence that their savings are kept properly,” said Yaron. “The banks need to realize that fairness to their customers, and the maximization of the value of their savings, is an essential element in maintaining their reputation, and therefore, their long-term stability.”
Yaron charged that the banks are not doing enough to offer the public fair interest rates on their deposits and asked them to present concrete plans that would expand the options available to customers for investing their money in interest-bearing deposits.
“Customers must also act and compare interest rates on credit and deposits by the banks, which are published on the Bank of Israel website to challenge the lenders,” Yaron urged.
The discrepancy has been causing outrage among the general public and some politicians over the past year, but Yaron warned lawmakers should not seek to interfere to ease the burden of credit and loan payments for households and businesses.
“Legislative intervention in pricing, such as obliging banks to offer a minimum interest rate on deposits or limiting interest rates on credit, may lead to undesirable results and sometimes even opposite outcomes,” Yaron cautioned. “Such interventions may harm the ability of banks to manage risks properly and allocate credit efficiently.”
