Finance Ministry reaches deal to open up Israeli banking
Recommendations to make credit card companies independent pave way for vast reform in close-knit financial sector
Raoul Wootliff is a former Times of Israel political correspondent and Daily Briefing podcast producer.
Ending a months-long stalemate over proposals aimed at increasing competition in Israel’s impervious banking sector, the Finance Ministry and the Bank of Israel have reached an agreement on the recommendations of a government committee on the issue, paving the way for vast reform and the creation of the first new bank in nearly 50 years.
After securing the support of Bank of Israel Governor Karnit Flug, Finance Minister Moshe Kahlon presented the final plans to the cabinet on Monday, vowing that the new reforms would benefit Israeli consumers and businesses alike.
“Today we can announce that after 49 years in which no new bank has been opened in Israel, the way has been paved for the founding of new banks,” Kahlon told the cabinet at the start of its weekly meeting.
“The understandings we have reached in the past few days with the Bank of Israel allow unprecedented opportunities. All the committees on the matter so far have not dealt with the middle class, those of modest means, and small and medium-sized businesses. The committee’s conclusions deal precisely with these groups, with citizens who have been compelled to cope with the concentration in the banking system,” he added.
The Strum Committee, formed by Kahlon and Klug in June 2015, is proposing three major reforms 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. The Finance Ministry says the proposals are aimed at curbing the overwhelming control of the sector enjoyed by the county’s two top financial institutions: the Hapoalim and Leumi banks.
The Finance Ministry hopes that separating the credit card companies will eventually allow them to become banks on their own.
The committee, chaired by Dror Strum, a lawyer and former anti-trust chief, issued its interim report in December but was 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 surrounding the credit card companies.
“I am happy that, in the end, after great effort by all involved, we have succeeded in formulating good recommendations for the benefit of consumers, while preserving the stability of the system,” Flug said Monday.
Prime Minister Benjamin Netanyahu, speaking alongside Kahlon at the cabinet meeting, said the proposed reforms would benefit “all Israelis.”
“Competition in the banking sector will ease the credit situation for small and medium business. And separation between the major banks and credit card companies is the start of a comprehensive reform that will be good for all Israelis,” Netanyahu said.
Recent years have seen a boom for the close-knit banking sector, with Israel’s two biggest banks registering significantly increased profits and lending to Israeli households during 2015.
Bank Hapoalim, the largest bank, reported net profits of more than NIS three billion ($790 million), up from NIS 2.7 billion ($698 million) in 2014. Deposits and loans also increased during 2015.
Bank Leumi announced net profits of NIS 2.8 billion ($727 million) for last year.
In the run-up to Knesset elections last year, Kahlon, who heads the Kulanu party, vowed to “beat the banks” if elected, as part of a campaign to reduce Israel’s high cost of living.
At a June 2015 press conference announcing the initiative, Kahlon said the committee would aim to introduce “real competition in one of the most centralized sectors of Israeli economy – the banking system.”
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 hold 70% of the industry, a situation that costs consumers hundreds of shekels in tariffs every year.
“Competition is the best friend of the consumer. It is good for companies and it is good for citizens, and this is why we aim to promote it in every sector,” he said at the time.
The Strum committee’s members included Prof. Avi Ben Bassat, a Hebrew University professor of economics, Amir Levi and Yael Mevorach, the director of budgets and deputy director of budgets, respectively, at the Finance Ministry; Nadine Baudot-Trajtenberg, deputy governor at the Bank of Israel; Prof. David Gilo, who quit as anti-trust commissioner over the government’s natural gas deal; Avi Licht, deputy attorney general on fiscal and economic matters; and Prof. Nathan Sussman, manager of the Research Division at the Bank of Israel.
Times of Israel staff contributed to this report.
