At the beginning of the month, the finance minister appointed a committee headed by the treasury's director-general, Ohad Marani, to review the implications of selling the state's shares holding in Bank Leumi via the stock exchange. The committee was asked to look into the issue of whether the bank could be stably managed in the absence of a small group of investors with a controlling stake.

The committee was also mandated to consider the implications of an excessive concentration in the banking and insurance sectors that is likely to occur as a result of the privatization. The intention here is to consider responses to the possibility that Israel's largest insurance company, Migdal, will ask for permission to acquire a controling stake in Leumi.

Leumi holds 20 percent of Migdal's capital, while Migdal, in turn, controls 9.5 percent of the capital of the bank. This is just one, narrow aspect of concentration in the banking sector, but there are many others that the committee would do well to consider. After all, since the Brodet Committee recommended in 1995 that the banks reduce their holdings in non-financial companies, there hasn't been a single serious discussion about the level of concentration in the banking sector. This, despite the fact that the level of concentration has not decreased since then and that this aspect of Israeli banking affects a wide range of activities in which banks are involved - from granting credit to households, to operations in the capital market via providence and mutual funds.

The three major financial sectors in Israel - banking, insurance and pension funds - are very highly concentrated. The five largest banks and the five largest insurance companies control 90 percent of their respective sectors. In the area of pensions, the situation is even worse, with Mivtachim controling 55 percent of the market, and the second largest fund, Makefet, controling another 25 percent.

Furthermore, conflicts of interest and other structural problems hamper the development of the banking system. The total control that the banks have over provident funds (90 percent of the assets of the funds) presents a conflict of interest in terms of investment operations on behalf of pension fund members.

The bank's ownership of the credit card companies constitutes another structural problem that brings about a lack of competition - as we saw last month when all the companies started to charge new commission fees at the same time.

The intertwined ownership structure between the three large banks - Hapoalim, Leumi and Discount - and the three largest insurance companies - Clal Insurance, Migdal and Harel Investments - holds the potential for future cooperation that will only increase the already-high level of concentration.

It is clear to everyone that one cannot sever these interlinked ownerships, just as one cannot dismantle the monopoly of the Mivtachim fund. But this is undoubtedly the time and the occasion to conduct a thorough investigation into the reciprocal relations among the major players in these markets.

Such an investigation must be undertaken before Leumi is privatized, so as to avoid structural distortions in the financial system. It would also be proper to let potential bidders for Leumi know ahead of time of the possible limitations that could be imposed on the bank in the foreseeable future.