Banks widening margins despite lower interest
While the Bank of Israel interest rate drops to an unprecedented low, businesses are complaining about "growing margins:" interest that banks are charging their clients is rising instead of falling. Bank managers confirm that banks have increased their margins on credit extended to business customers, but there is still no indication of a similar trend for credit extended to households.
The banks say that margins on business loans have sharply increased over the past two months by an average of 0.5% - 1.0%, mainly from interest charged to small employers. The banks are unapologetic. Small business credit, they explain, is more expensive because it is riskier than loans to large business.
Some estimates indicate that the increase is even sharper. While the margin above prime interest rate (Bank of Israel's interest rate plus 1.5%) in the past stood at around 2% - 3%, it has jumped to 4% - 5% since the economic deterioration. These are only averages, since variation among large companies depends on many parameters such as size, leveraging, collateral to the banks, and other factors.
A partial picture of the increase of bank margins can be seen in Bank of Israel data on the development of shekel credit interest. This credit constitutes the majority of all credit offered to the public. Interest on such credit last August stood at 6.37%, dropping in November to 5.82% (down 0.55%), a figure that does not fully include the Bank of Israel's lowered short term interest rates. Between July and November, central bank interest rates were cut by 0.75%. As a result of this difference, margins increased from 2.37% to 2.66%.
Despite the criticism that has been leveled against the increased margins, the banks say that the pricing reflects their adjustments to increasing risk. Judging by his comments during a conference of the Association of Banks in Israel last week, central bank governor Stanley Fischer is somewhat understanding. Fischer assured participants that he accepts the reasoning behind increased margins - but called on them not to overstress the risk adjustment at the expense of stifling the economy. One of Fischer's key concerns is that banks will take advantage of the crisis to increase their margins by more than they should.
The banks have so far dismissed accusations of strangling the economy, and say that although lower interest rates are not passed on in full to customers since risk is in the rise, clients are benefiting nevertheless. They also say that margins are rising in their own credit sources. This can be seen in the extra-bank market, where margins have leapt higher than government bonds that are available to banks, to 2% or more, compared to just 1% a few months ago.
"The real question that arises from the rate cut yesterday, is whether the lower interest rate will be passed on to the business sector and lead to increased economic activity, or whether it will only widen bank margins and serve to increase their profit and stability", Excellence Nessuah's chief economist Shlomo Maoz said yesterday. "If the interest rate is not passed on to the business sector, which is currently finding it difficult to raise financing, lowering of the interest rate will be interpreted by the public as an attempt to strengthen banks, and not necessarily an attempt to improve Israel's economy.