Taking Stock / The bankers at war
Two weeks after going to war, the bankers found the weak point: the Knesset members. Yes, six months ago 51 Knesset members signed a legislative proposal to separate the banks from their provident and mutual funds. But massive pressure by the bankers, plus the political parties' enormous debts to the banks and the clever lobbying, could yet engender surprising results.
One of the members of the Knesset Finance Committee called us in a fright. The bankers had presented a horrific vision of Israel's destruction, he doesn't understand what the whole thing is about anyway, and he's desperately seeking solid facts on which to rely.
So here is a short guide for frightened Knesset members who find themselves embroiled in one of the most important reforms carried out in recent memory.
The bankers will ask: "Separate the provident funds from the mutual funds? Who exactly would buy them? The insurance companies? They are as bad as the banks. Private brokers? They are twice as dangerous as the banks.
To which the MK could answer: "Right. Actually, for the last seven years I've been reading in Haaretz column after column warning about the insurance companies. The very same people touting separation of the banks from the provident and mutual funds wrote the columns. These correspondents said "managerial insurance" was "insurance for suckers" and claimed the fees the insurance companies and their agents were charging savers in life insurance policies were so excessive that the banks could never reach such levels.
"Yes, the insurance companies, just like the banks, have a lousy record of service, and a lot of their business model was based on misleading, and on the clients' ignorance.
"Some of the private brokers now boasting gorgeous yields are wolves disguised as market animals. The best have been around for years, beating the banks in performance, while the worst generated their high yields when the market was riding high, and at other times did dreadfully.
"At present the banks rule the customer, the advice to the customer, the marketing and the management of all the major investment vehicles. So they have no incentive to provide objective advice and good management.
"The Bachar team is supposed to propose a new model for the capital market, based on banks that provide objective advice (because they will be banned from managing funds or taking commission from them), and on non-banking bodies competing over management.
"There is also a good chance that legislation separating the banks from their provident and mutual funds will bring foreign investment management companies to Israel. The moment we have a lot of players managing investments on the one hand, and banks that provide purely objective advice on the other hand, the capital market will have a healthier structure."
The bankers will ask: "But there are Chinese walls at the banks. There is a law governing advice given at the banks. The banks are regulated with a heavy hand. There is supervision. Why the need to separate the banks from their provident and mutual funds?"
To which the MK could answer: "Chinese walls don't work because conflicts of interest will always persist, and supervision always fails and regulation hurts more than it helps.
Instead of Chinese walls, regulations, regulators, investment committees and all sorts of bureaucratic mechanisms, the answer is a new structure for the capital market, one in which all the players have incentives to provide the best possible service at the lowest possible prices, instead of exploiting the customer's weakness, ignorance, and inability to shift his investments because of his dependence on the bank.
The bankers will insist: "Why are banks outside Israel allowed to manage investments? Are Israeli regulators smarter?"
At which the MK will retain his composure: "In the U.S. and Europe, the financial systems are large and diversified, with all sorts of players involved. That is not the case in Israel. Actually, we have no financial system at all; we only have a banking system that controls most of the public's assets. The banks here are like financial supermarkets skinning the public from every possible direction."
The banks' complete and utter control over the capital market is one of the main reasons Israel does not have a developed money market. An economy relying on commercial banks, with no evolved capital market alongside, is less competitive. Its services are inefficient, its range is narrow, and its prices are higher.
The banker is stung: "What about the principles of a free market? Why are bureaucrats allowed to constantly intervene in business management, especially the management of successful businesses like the banks?"
To which the MK could answer: "Where the free market falls down and an oligopoly takes root, the regulator must intervene to create more competitive conditions.
"That is the main purpose of the capital market and banking reform that the Bachar team is proposing. Instead of having regulators intervene in management and force the banks to build Chinese walls, the opposite should be done. Ownerships must be teased apart in order to eradicate the flaws in the market and to abolish the embedded conflicts of interest. A competitive market structure could prevent the need for the regulator to intervene in pricing or management."
The banker will add: "Remember those debts your party owes the banks? Remember that what comes around, goes around? I can arm you with populist arguments to oppose the reform on grounds of principle."
To which the MK will answer, we hope: "Not this time, buddy, This time the reform is too big, too important, too historic for me to let you kill it. Even our cynicism has its limits."