All That Glitters / The chopping block: After cell phone bills, bank fees
The Bank of Israel could be the Moshe Kahlon of the finance industry, but don't hold your breath.
As a result of the revolution in the cell phone market, consumers have seen their phone bills shrink by at least 50%. Will bank fees soon undergo a similar unpheaval?
The truth about bank fees is that they are low for big companies, but very high for individuals and even higher for small businesses. For example, Bank Leumi, controlling one third of the banking sector, states in its first quarterly report for this year that its returns on capital invested in the business sector were 4.7%, while returns on capital invested in small businesses reached 29.1%. In other words, for every capital unit invested, the bank made NIS 6 from small businesses, as opposed to NIS 1 from large companies. Mutatis mutandis. This is true for other banks as well.
What underlies this huge gap? The answer, not surprisingly, is competition. The big companies know how to negotiate with the banks, putting out tenders before hiring bank services and threatening to directly extract loans from the public through the markets, i.e. by issuing bonds. Knowing all the bankers' tricks, they also hold out the possibility of getting credit and services from foreign banks. Thus, they end up getting optimal terms and rates.
Such competition is non-existent for individuals and small businesses. Some are held captive by their banks, with no bargaining power when confronting their bankers. Small operators and individuals are also severely lacking in professional knowhow when dealing with their banks. They cannot issue bonds, and foreign banks are inaccessible to them, leaving them with much higher fees.
There is another frustrating aspect to this state of affairs. The risks to the bank are actually much higher when dealing with big business, as compared to smaller enterprises. Any problem the bigger customer runs into can take a large bite out of the bank's profits. On the other hand, individual clients and smaller businesses are far more numerous, thus spreading the risks. They are also much more likely to make supreme efforts to stay out of trouble and meet all their financial commitments. In terms of risk, individuals and smaller businesses should be paying less, not more.
This reflects the situation in the cellular phone market prior to the recent revolution. Large companies with the buying power of multiple customers received rates that are only now becoming available to individuals. In both the cellular and banking worlds, large companies enjoy preferential benefits due to the non-competitive market for individuals and small businesses.
In both the banking and cellular phone sector, senior and mid-ranking managers draw exorbitant salaries, often unrelated to capabilities or real achievements. Much of the profit in both sectors derives from the unnecessary complexities of the services rendered and the ways they are billed, as well as from selling the public extra services that are not really required, and which come with a high price tag that is not easy to decipher.
If the similarities between both sectors are so glaring, why not employ the same formula that worked for mobile phones, by immediately opening four new banks that will compete for customers and cause a rapid decline in fees? The answer is that the Bank of Israel is not interested in this development, and will thus not approve it.
Paying a 'tax' for bank stability
This is so not out of malice or out of insensitivity to the interests of the public. There is one striking difference between banks and cellular phone companies. If a cellular phone company collapses, there is no real damage to clients or to the economy. Within days customers will find an alternative supplier, several developers will lose money, and that will be the end of it. However, if a bank collapses, the entire banking system and financial markets are affected, sparking a potentially widespread economic crisis. This has happened in the past on numerous occasions, in many countries. In 2008, the U.S. authorities allowed Lehman Brothers to go under, pushing the global economy to a financial abyss and triggering a severe crisis. Only two weeks ago, the government of Spain nationalized a bank in an attempt to contain a spread of financial woes. This sensitivity to a failure of banks is a result of the business model under which the system operates, and of the economic role banks play.
Not all funds deposited in a bank are held as liquid assets. Thus, when its solidity and reliability are called into question, there is always a risk of a 'run' on the bank, in which multiple clients withdraw their money at the same time, which can then topple the bank. This is currently the greatest risk facing the financial markets in Europe. Banks are the lifeblood of the economy. A market can function without cellular phones, but not without banks, checks, payments and credit.
This is a risk that the Bank of Israel, perhaps Room for reduction? Mortgage bank workerrightly so, is not willing to take. A financial crisis and the ensuing economic disarray are most costly to citizens than any other crisis besides war. The Bank of Israel considers stable and profitable banks to be a national necessity and asset. A scenario in which new banks are established, with an accompanying drop in fees and revenues, is too much of a risk.
These considerations reveal the true state of affairs. The costs of banking services can be viewed as a kind of tax paid for maintaining the stability of banks, or as a compulsory insurance premium for securing national banks. The Bank of Israel does not even bother to sweep this truth under the carpet. In a recent discussion in the committee for economic affairs at the Knesset, Governor Stanley Fischer said explicitly that "we cannot expect the banks to go on reducing interest rates and their fees, while continuing to offer credit and maintain their stability. If the stability of banks is not maintained, we will find ourselves with unprofitable banks, and when a crisis arrives we will suffer the fate suffered by many banks across the globe during the last financial crisis". Straight and to the point. But is this situation pre-ordained? Does a stable banking system really require reduced competition and high fees? Here are three reasons why this is not the case.
First of all are the workers and their salaries. The fact that 50,000 bank employees earn salaries that are higher than that of any other sector, averaging NIS 28,000 a month, is unrelated to bank stability and does not contribute to it. On the contrary, these salaries are the result of very powerful unions, which are fully backed by the Histadrut labor federation.
A reduction in salary expenses would certainly contribute to bank stability and profitability, as well as allowing a reduction in fees paid by the general public. Senior bankers we have spoken to in recent months claimed that, in their estimation, manpower and salary excesses in the banking sector cost the economy between NIS 5 billion and NIS 10 billion year. Stanley Fischer would probably not oppose savings on this scale, but he has no interest in confronting the banks and precipitating lengthy strikes and the resulting economic turmoil.
Secondly, if banks indeed serve vital functions, comparable to those of the police and army, if their stability is guaranteed by the government in case of difficulties, and if employees enjoy job security and pensions comparable to state employees, why do banks need to function in the private sector with salaries compatible with those of the business sector? One could conceive of other banking models which could make the system more efficient and less centralized. These could function as does the Postal Service Bank (Bank HaDo'ar ) or as an Internet-based bank with no branches.
Thirdly, new studies show that a change in financial regulation would allow more equitable growth, with the fruits of economic activity shared by a wider range of beneficiaries. This can be done without compromising the stability of the system. In an article disseminated by the OECD, economist Ross Levine of Brown University argues that the regulator - the Bank of Israel, in this case - should be strong enough to implement a policy of competition and transparency and to enact sufficient incentives for the bankers, while maintaining a stable system. All it takes is a rolling up of sleeves, digging into the mire and going to work, not something the Bank of Israel and the government are renowned for. After all, those managers enjoy job security, comfortable salaries and pension, and opportunities for 'cushy' jobs after retirement in these same banks. So it is much more reasonable for them to maintain the status quo and leave the difficult and risky tasks to future generations.