Bottom Shekel / Decide, says BoI: You can borrow or lend - not both
In the case of the Ofers, Supervisor of Banks David Zaken is saying that the giant loans they took out during the last two years, to buy the Ramat Aviv mall from Africa Israel and malls construction company British Israel, are not to his liking.
At the very time that the economic concentration committee, headed by Haim Shani and Eyal Gabai, is struggling to write final drafts of its recommendations, for delivery to the prime minister, one of the committee members is taking action. Supervisor of Banks David Zaken isn't waiting to start cleaning up the banking sector.
Zaken has been involved in recent weeks in a brisk exchange of letters with the Ofer family, who are among the controlling shareholders of Bank Mizrahi-Tefahot; with the Yitzhak Manor family, among the controlling shareholders of Union Bank; and with the IDB concern. Not that Zaken has any new directives to hand down; he's merely demanding that they comply with the directives set out in their permits to own controlling interests in banks.
In the case of the Ofers, Zaken is saying that the giant loans they took out during the last two years, to buy the Ramat Aviv mall from Africa Israel and malls construction company British Israel, are not to his liking.
Why? Because the owners of banks should be flush with capital.
Zaken, as supervisor of banks, doesn't want Israel's bank owners to be awash in debt - and certainly not debt related to the high-risk business of real estate investment. He took the unusual step therefore of advising the Ofers that if they don't reorganize their business and sever the ties of dependence between Bank Mizrahi-Tefahot and their hideously leveraged other businesses, he will recommend that the Bank of Israel change the terms of the permit to own a controlling interest in the bank.
Which means what?
It means the Ofers are in violation of their permit. If they don't resolve their internal issues and stop loading the company that controls Bank Mizrahi-Tefahot with more and more loans, the supervisor of banks will flex his muscles and change the rules of the game.
A case of multiple hats
The case of the Manors at Union Bank is different. Bothering Zaken in this case are the multiple hats that the Manors wear. They own a controlling interest in Union Bank and also own a controlling interest in the IDB group, which owns Clal Insurance. That's against a law enacted in 2005 and prohibiting a single entity from owning controlling interests in a bank and any company managing investment portfolios (which Clal Insurance does ), for reasons of conflicted interests.
Zaken therefore ordered the Manors to make up their mind: Choose Union Bank or IDB. Yitzhak Manor has already resigned from the Union Bank board of directors, and has a year to decide what to sell.
In both cases, the supervisor took action irrespective of what the economic concentration committee on which he sits may do. But it is clear that the general intent of the committee includes cleaning stables in the financial system, based on the following principles.
1. Separation of heavily-leveraged non-finance companies and finance companies: Beyond the conflicts of interests, if the first fail, they could bring down the second, imperiling the broader financial system.
2. Anybody who wants to own a controlling interest in a bank must have minimal equity: Bank owners have to decide - be big lenders or big borrowers, but they can't be both.
3. Business groups may not own banks and insurance companies and investment houses: This is a corollary to the Bachar Reform, which banned banks from engaging both in lending and in the management of their clients' money, for fear of conflicts of interest.
Zaken's correspondence with the Ofer family shows that the supervisor of banks has been fairly velvet-gloved so far when it came to enforcing the rules with the family. He leaned in its favor when they bought the Ramat Aviv Mall from Africa Israel. He stayed nice when they bought British Israel, merging it with their company, Melisron. But now Dudu Zaken has had it. He sees how the shareholders equity at the company through which the Ofers own their interest in Bank Mizrahi-Tefahot has been shrinking. What the supervisor sees is that the hands holding a bank in Israel are financially weakening.
The gentle way the Bank of Israel handled the Ofers attests to the fact that regulation in Israel isn't as tough as it's painted. On the contrary, it is flexible and considerate. But the upshot of its behavior is that the bank owners can't help pushing the envelope. There is no better time than this to change the rules of the game, through the economic concentration committee. The conflicts of interest must be reined in and the strength of the financial system must be preserved; the structure must be made healthier, less concentrated and more competitive.