Cabinet approves bank reforms to boost competition
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Cabinet approves bank reforms to boost competition

Move to decentralize power of big banks has raised international concerns that market stability could suffer

Israeli Finance Minister Moshe Kahlon attends the weekly cabinet meeting on July 31, 2016. Photo by Ohad Zwigenberg/POOL
Israeli Finance Minister Moshe Kahlon attends the weekly cabinet meeting on July 31, 2016. Photo by Ohad Zwigenberg/POOL

The Israeli cabinet approved draft legislation Sunday which aims to open up the credit market to greater competition. The legislation was drafted by Finance Minister Moshe Kahlon, whose vow to “beat the banks” to help reduce Israel’s high cost of living was a central tenet of his 2015 election Kulanu party campaign.

The legislation, which still needs Knesset approval, was first brought to the cabinet in June. It aims to reform the banking industry by curbing the power of Israel’s largest banks and enabling new smaller players to enter the market.

According to Reuters, the International Monetary Fund has criticized the legislation, saying it is based on outdated information and may cause an excess of easy credit — thereby destabilizing the banking system. Bank of Israel Governor Karnit Flug, though supporting the reforms, warned that “More banks and more small banks, and more financial brokers that are not banks, mean a higher risk of collapse.”

Supporters counter that the reforms will allow for the establishment of new banks and will encourage greater competition that will benefit consumers.

Finance Minister Moshe Kahlon (right), seen with Bank of Israel Governor Karnit Flug during a press conference at the Finance Ministry in Jerusalem, June 3, 2015. (Yonatan Sindel/Flash90)
Finance Minister Moshe Kahlon (right), seen with Bank of Israel Governor Karnit Flug during a press conference at the Finance Ministry in Jerusalem, June 3, 2015. (Yonatan Sindel/Flash90)

The reforms are based on the recommendations of the Strum Committee which was formed by Kahlon and Flug in June 2015. They include three major changes aimed at increasing competition: a deposit insurance law, which would ensure that the government will back up deposits even in banks that have less than five percent market share; allowing non-banks to provide credit to consumers; and separating the ownership of credit card companies from that of banks.

Kahlon, who made a name for himself by opening up the cellphone industry to competition while serving as communications minister five years ago, said the country’s three largest banks, Bank HaPoalim, Bank Leumi and Israel Discount Bank control 70% of the market, a situation that costs consumers hundreds of shekels in tariffs every year.

If the reforms are passed, the two largest banks, Bank HaPoalim and Bank Leumi, would be forced to sell off the credit card companies they currently control.

The committee’s interim recommendations were issued in December but were met with opposition from the Bank of Israel, which argued that overambitious reforms could threaten the stability of the banking sector. Flug fought with some measure of success to soften parts of the proposed regulation, but was forced to give in on a number of key issues relating to the credit card companies.

When first introducing the legislation Kahlon claimed that it laid the groundwork for the establishment of new banks in Israel for the first time in 49 years.

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