Finance Minister Bezalel Smotrich on Tuesday spoke out in favor of taxing the country’s banks’ excess profits driven by the fast rise in interest rates.
Speaking at the Israel Democracy Institute conference, Smotrich said he sees a “lot of logic” in introducing a high tax on the banks’ large excess profits. The TA-Bank index, which tracks the five largest banks, dropped 2.4% at the close on Tuesday following Smotrich’s remarks.
Israel’s lenders, including Bank Hapoalim and Bank Leumi, have posted record net profits over the past year as fast interest rate hikes and rising inflation boosted financing income and helped its credit and loan operations flourish, while repayment costs for mortgage holders have ballooned.
“They are making these profits not through hard work and efficiency but from the large interest differentials between credit and deposits,” Smotrich said.
Since hitting a low of 0.1% in April 2022, the Bank of Israel has steadily hiked the benchmark interest rate to 4.75% on May 22 to try and cool inflationary pressure. This in turn has allowed banks to raise rates for borrowers. The average cost of monthly mortgage repayments has gone up by more than NIS 1,000 ($270) over the past year.
Smotrich, whose speech was interrupted several times by protesters of the judicial overhaul, said such a tax would work as a disincentive for the banks to generate excess profits from rising interest rates and instead motivate them to “roll them back to the public using a variety of tools at their disposal.”
“This is the best way to correct the distortion created by the interest rate differential and make it easier for mortgage holders, without harmful legislative intervention as proposed by private bills that have been tabled,” Smotrich remarked. “It would also maintain the stability of the banks and the independence of the Bank of Israel, which is critical in a modern Western economy.”
Back in November, Knesset Finance Committee head Moshe Gafni proposed a private bill to freeze mortgage rates as borrowing costs go up.
Earlier this month, Bank Hapoalim reported a net profit of NIS 2.01 billion ($540 million) for the first quarter bolstered by a 49% surge in net interest income year-on-year, which amounted to NIS 4.04 billion ($1.1 billion). Bank Leumi saw its net interest income surge 36% to NIS 3.9 billion ($1.05 billion) in the first three months of the year compared to NIS 2.7 billion ($730 million) in the corresponding quarter last year.
Also speaking at the IDI conference, Bank of Israel governor Amir Yaron said that it was not “surprising” that the high interest rate and inflationary environment of around 5% have led to high profitability of the banking system.
“I expect the banking system to pass on the interest rate increase to the public not only through the rise in the cost of credit, but also by raising deposit rates,” said Yaron.
The public’s shekel deposits in the banking system stand at NIS 1.4 trillion ($380 billion), of which more than NIS 500 billion ($130 billion) are in current accounts. The latter do not bear interest for depositors, but generate interest income for the bank, Yaron said.
“I say clearly to the banks: You must act fairly, with long-term strategic thinking, and alert customers to the fact that they can put their money in interest-bearing deposits, and give them the opportunity to enjoy the benefits that accompany the high interest rate environment,” he urged.
Should the banks fail to act on this, the Bank of Israel will not hesitate to use regulatory tools at its disposal, to ensure that they will be obligated to contact customers proactively and offer them more attractive savings tracks than current accounts, Yaron said.
Yaron commended the banks for offering some easing terms for hard-hit mortgage holders, such as a temporary freeze on monthly mortgage rates as interest rates go up but called for more such measures.
Yaron also hinted at further interest rate hikes should the shekel continue to weaken in coming weeks. That’s after the local currency depreciated more than 2% against the dollar last week amid renewed market concern over the advancement of the proposed judicial overhaul. A weaker shekel is making imports more expensive and is fueling inflationary pressure.
Yaron noted that since the beginning of the year as the newly formed government started to advance the proposed changes to Israel’s judicial system, the “excess” devaluation of the shekel of 10% versus the dollar has had a material impact on inflation.
“The combination of excess depreciation and the pass-through from the exchange rate to inflation lead us to the conclusion that we have excess inflation of at least one percent,” Yaron said.