Analysis / A revolution in the making
The separation of provident funds, mutual funds and underwriting from the banks will mean that NIS 290 billion in the public's assets will be managed by new entities, and not the banks.
The separation of provident funds, mutual funds and underwriting from the banks will mean that NIS 290 billion in the public's assets will be managed by new entities, and not the banks. Of those NIS 290 billion, NIS 270 billion are now in the hand of the banks.
Management of these assets, a substantial portion of the general public's savings, will be transferred to other entities, such as private brokers, insurance companies and other private companies, and maybe even international investment banks.
This is a revolution in the status of the banks, which will stop managing the public's financial market investments. The banks will continue to manage only deposits and savings plans.
This is also a revolution for the financial market, as the banks will no longer have absolute control, and the number of strong entities operating on the market will increase substantially. As a result, competition in the financial market is likely to develop and many instruments undeveloped to date - because the banks saw them as competition - will now become available.
The Bachar Commission members hope the recommendation will also lead to a revolution in the country's economic structure and the banking system, now under the total control of a duopoly. The commission is striving to weaken the two major banks by separating each from all these operations, in the hopes that other Israeli banks will in parallel become stronger.
This gain in strength can be created through provident and mutual funds not being separated from the smaller banks, or if the separation in mandated for all banks, then through steps to encourage smaller banks to merge, either with each other or with insurance companies. In this way, the banking sector created by the Bachar Commission will be more egalitarian and much more competitive than the current situation.
And what does the public gain?
The public should profit from these structural changes. Improved competition in the financial market and banking sector will streamline the system, reduce fees and interest rates, and increase resources for growth and capital available to the business sector and the general public.
The public will hopefully also gain directly from the fact that the management of its assets will be taken out of the hands of the banks and handed over to others who will prove more daring and innovative. Just increasing the number of investment managers for the public's assets will allow customers to choose better managers for their money. The public's situation will particularly improve if the result of the Bachar recommendations leads to investment managers from the world over choosing to come to the Israeli market. Merrill Lynch's asset management is certainly not inferior to that of Bank Hapoalim.
On the other hand, the public will probably raise concerns that its moneys might be "abandoned" in the hands of unknown entities. The commission will have to deal with that fear. One way is to ensure that mutual and provident fund moneys will continue to be deposited with the banks, although they will be managed by external entities.