Israel's banking system is on high alert as it awaits the results of Tuesday's election, in particular over the question of the identity of the next minister of finance, and whether it will indeed be Kulanu leader Moshe Kahlon, who is determined to carry out reforms at the banks.
We saw clear evidence of the sensitivity of the banking industry yesterday, when Prime Minister Benjamin Netanyahu announced his intention of appointing Kahlon as minister of finance in his next government. The announcement immediately sent bank shares sliding, and they fell by about 3%.
Last week, most of the banks held press conferences marking the release of their 2014 financial statements. The banks that were asked about Kahlon's plans responded cautiously. "At the moment we're listening; we'll talk after the election," said Bank Hapoalim chairman Yair Seroussi, while First International Bank of Israel chairman Rony Hizkiyahu responded with, "We'll get through the election period and we'll see who the finance minister will be." In fact, the banks, especially the big banks, realize that they have to prepare for a rearguard action.
In the current election campaign, in which much of the public discussion is about the cost of living, the banks, as a sector seen as ripping off the public, have taken a large share of the headlines, certainly in comparison with previous election campaigns. Several political parties have said that they intend to boost competition in the banking industry, in which two banks, Hapoalim and Leumi, have a market share of over 60%. But the person who put the banks at the forefront and even presented a detailed plan of how to deal with them is Kahlon, who appears to have the highest chance of being appointed the next minister of finance.
Kahlon tried to shake up the banking system eight years ago, when he was chairman of the Knesset Economic Affairs Committee, and, together with then Supervisor of Banks Rony Hizkiyahu, introduced reforms in current account charges. The reform did simplify the banks' complicated fee structures, but the public did not make dramatic savings. Kahlon did not touch the banks' real fleshpots, such a securities commissions or interest on household accounts, whether for deposits or credit. Will he do so now?
Kahlon wants to do to the banks what he did to the mobile telephony companies, which is aggressively to introduce new, cheaper players, to weaken the big banks, and to open the market to full competition. But with due respect to Kahlon's motivation and his record in the telecommunications market, he has a much tougher job waiting for him in the banking industry, which is much more complicated than the mobile carriers, which sell a service. The banks hold the public's savings, and if one of them should collapse, the damage would be considerable, unlike the case of the collapse of a mobile carrier, which would not affect the public very much.
Moreover, the banks have a regulator, the Bank of Israel, which is responsible for their stability, and will not allow overly dramatic steps that will cause shocks. For example, the Bank of Israel has announced in the past that it opposes the idea of the banks selling their credit card companies, as Kahlon proposes they should, although in this case the Bank of Israel's opposition is not so much to do with the banks' stability as with the fear that such a step would only transfer the banks' stranglehold on the market to other hands. It is hard to see a finance minister introducing by force proposals opposed to the Bank of Israel's stance. The fact is that Kahlon succeeded in the bank fee reform largely thanks to the Bank of Israel's cooperation.
So where could a finance minister nevertheless bring about change in the banking system? One of the main parts of Kahlon's plan is to give concessions to new players. There are many barriers to entry into the banking business, and Kahlon proposes providing assistance in the form of government grants (to help banks meet the Bank of Israel's strict capital requirements), state guarantees, tax breaks, and so forth. In these respects, the Ministry of Finance has full authority, and the proposed measures are fairly easy and simple to implement, but will they be enough to attract new players to a system in which no new bank has arisen in forty years?
The big banks have already started gearing up for this possibility, and, coincidentally or not, Bank Hapoalim and Bank Leumi both announced last week that they intended to set up Internet banks next year with cheaper prices. This is a sort of signal to potential new players that they ought perhaps to think twice about entering the field when the two big banks are about to offer the same product they intended to offer themselves.
Bank sources say that even if no dramatic reform is introduced, the current campaign is worrying. They say the public's growing antagonism towards the banks is being backed by politicians, something that cannot be ignored. It was enough to see Kahlon's response last week to Bank Hapoalim's streamlining plan: "This isn't streamlining, but greed," to understand that the banks will not enjoy the next government's support.
Published by Globes [online], Israel business news - www.globes-online.com - on March 16, 2015
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