Governor of the Bank of Israel Prof. Stanley Fischer yesterday landed a weighty tome on the government's desk: the 2009 Annual Report has 370 pages, plus 144 pages of appendices, and 400 charts. Hidden in the report is a tiny recommendation that threatens to revolutionize the Israeli economy: separation of non-financial and financial corporations.
It is not good, says Fischer, that the owners of real companies (such as Ofer Holdings Group) also control financial companies (such as Mizrahi Tefahot Bank (TASE:MZTF). It is improper, he says, for a non-financial corporation (such as IDB Holding Corp. Ltd. (TASE:IDBH) to control a financial company (such as Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS). It makes concentration worse, and it is not good for the economy.
At present, the Israeli regulator does not provide a solution to the problem of non-financial corporations' control of financial companies. In the late 1990s, the Brodet committee limited the banks' ability to control non-financial corporations. A bank may hold only 20% of a non-financial corporation, and only one conglomerate.
However, no one has thought to restrict ownership of a bank by a conglomerate that sprawls across the economy. In the climate of the time, the legislature did not see the need. The sole legal restriction, passed in 2005 on the basis of the Bachar committee recommendations, bans cross-ownership of banks and insurance companies.
Fischer proposes a solution, and it implies a restructuring of the Israeli economy. Please note what Fischer has to say: separation between corporations and financial companies. In other words, reshuffle the deck, and, through legislation, compel the economy's tycoons to sell either their financial or their non-financial holdings.
Such a shock to the system has not been seen since the Brodet committee forced the banks to sell their non-financial holdings. At the time, Bank Hapoalim (TASE: POLI) sold its stakes in Clal and Koor Industries Ltd. (TASE:KOR), and Bank Leumi (TASE: LUMI) divested itself of Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) and Africa-Israel Investments Ltd. (TASE:AFIL).
How will the proposed separation be implemented? Will every non-financial corporation, even the smallest of them, be banned from owning a bank or insurance company, and how long will it take to sell the assets? Such questions need answers.
At the end of the day, if the proposal is carried out, Zadik Bino will have to choose between Paz Oil Company Ltd. (TASE:PZOL) and First International Bank of Israel (TASE: FTIN1;FTIN5); and the Ofer family will have to choose between Israel Corporation (TASE: ILCO) and Mizrahi Tefahot Bank. At larger corporations, there is no question of choice: IDB Holding Corp. Ltd. (TASE:IDBH) chairman Nochi Danker will have to sell Clal Insurance, Delek Group Ltd. (TASE: DLEKG) controlling shareholder will have to sell Israel Phoenix Assurance Ltd. (TASE: PHOE1;PHOE5), and Bank Hapoalim controlling shareholder Shari Arison will have to sell Shikun u'Binui Holdings Ltd. (TASE: SKBN).
Fischer's position has immediate implications, because he is not just targeting current holdings, but also future ones. Today, if Tshuva sells Phoenix or Dankner sells Clal Insurance, neither of them will have any legal barrier to buying a bank. Fischer is clearly signaling that he won't allow it.
Anyone who thinks that these are impossible ideas should remember that the Bank of Israel is not some research institute that writes theoretical position papers, and that the Governor of the Bank of Israel does not write recommendations to be filed away is some drawer. When Stanley Fischer puts such a recommendation on the table, then the issue is on the agenda.
Published by Globes [online], Israel business news - www.globes-online.com - on April 22, 2010
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