Reforming the Finance Sector, in Name

Feeble recommendations may not even pass the Knesset hurdle.

Competition in Israel's financial industry is another area where reform has lacked teeth. The committee tasked with addressing concentration of power within the Israeli economy had recommended banning companies from owning both financial and non-financial businesses. It had also called for "flattening" out pyramid control structures, so that one person at the top would not be controlling subsidiaries of subsidiaries of subsidiaries, etc. But that committee's proposals were not dramatic enough, and some may be dropped when they reach the Knesset Finance Committee.

The committee's final recommendations, released last week, could be considered the beginning of the cure. They call for forcing the country's largest business groups - those owned by Nochi Dankner, Yitzhak Tshuva, the Ofer family and a few others - to choose between their financial and non-financial holdings. This is designed to minimize conflicts of interest, to increase competition by allowing for a more efficient allocation of capital, and to reduce the cost of living over the long term. The recommendation to flatten control pyramids is also expected to increase competition.

A sign protesting against Bank Hapoalim.
A sign protesting against Bank Hapoalim, which was fined NIS 600,000: 'Say, if I make a mistake worth millions, can I also get off with a laughable fine?'David Bachar

However, even in these cases, the committee could have been braver. Finance Ministry budgets director Gal Hershkovitz has said that interested party transactions should be banned altogether - referring to transactions between two publicly held companies controlled by the same person - and that the big business groups should lose control of provident funds. Now the recommendations need to pass the Knesset Finance Committee, and it's not at all clear that they'll maintain their current form.

Another change in the works has received almost no attention from the public - fees on long-term savings. The Knesset Finance Committee approved a private-member bill by MK Haim Katz (Likud ) involving fees on provident funds, pension funds and managers' insurance.

That initiative, which received the Finance Ministry's blessing after extended negotiations, will cut management fees by 1.05% starting in January. Katz says he believes the public will save NIS 300 million a year as a result. However, it may also prompt mergers between investment houses, which would further reduce competition in the industry and harm consumers in other ways.

The public also appears to be unaware of the high cost of the lack of competition within the banking sector. Since the 2005 Bachar Committee recommendations removed the pension funds from the banks' management, there haven't been any significant steps to improve consumers' standing in this sphere.

The Trajtenberg committee found that this sector was particularly concentrated, with a duopoly of Bank Hapoalim and Bank Leumi controlling 57% of the market; five groups control 93% of the market, it noted. Banks offer households absurdly low interest rates on their deposits, while charging high fees on standard transactions. So long as customers don't complain, they'll keep on paying, and most customers don't bother to complain. TheMarker published some of the Trajtenberg committee's working papers, which stated that if the sector were to have more competition, the public could save NIS 8 billion a year. This works out to NIS 3,000 per household due to lower fees and higher interest rates on deposits.

The Trajtenberg report's chapter on banks was relatively short, but it called for appointing a team to review competition within the sector. The team, headed by banks commissioner David Zaken, was launched in December and is supposed to discuss launching a credit rating system for private customers, which would make it easier to receive loans. "This is an important team far from the public eye," said a senior capital market source. "Let's hope its recommendations have teeth and are implemented. There are many issues involving competition up for discussion, but no one is touching the banking sector."