Bank of Israel Governor David Klein told Ha'aretz yesterday that Israel's banks were stable, well-managed and had enough capital to absorb losses.
Questions about the stability of the banking system have arisen in recent months following the collapse of Trade Bank, a steep drop in the value of bank shares and a run on the government-owned Industrial Development Bank that forced the Bank of Israel to extend it a NIS 2 billion line of credit.
According to Klein, "The state of the banking system is such that customers have no need to worry about the fate of their money. I've also been asked by friends whether their banks are secure, but that doesn't mean that there is a reason for concern about the stability of the system."
The governor attributed the banks' losses to the economic recession and the collapse of global capital markets, saying he expected the banks would return to profitability as the overall economy improved. Yet he warned that "if an effort is not made to emerge from the economic recession, then this will gradually weaken the financial system."
While some have attributed the banks' woes to an irresponsible credit policy - extending business loans at unreasonably low interest - Klein told Ha'aretz, "I don't agree that one of the reasons for the failure of the banks is that wrong business decisions were made regarding loans. That's not true."
It was easy to be critical in retrospect, but it was not always possible to foresee the difficulties that lay ahead, he suggested. "There were quite a few loans that everyone thought were reasonable at the time. Only the circumstances changed since then."
Klein insisted that there was no cause for concern about the stability of Israel Discount Bank, which has recorded losses for several years. "The bank is under a strict management regime," he said, noting that the bank had slashed its payroll by hundreds of workers and was the first bank to trim its credit portfolio. "The bank has come a very long way. Therefore, I am not worried about stability, only about a shortage of capital," the governor added.
Klein also expressed complete confidence in the central bank's supervisor of banks, Yitzhak Tal, who has come under fire following the collapse of Trade Bank and the demise of Industrial Development Bank. "I don't accept the contention that the supervisor should be replaced. I completely reject this. The supervisor became a scapegoat. The supervisor is not responsible for the state of the economy; he is not responsible for the Nasdaq collapse or the intifada."
Nonetheless, Klein said that the central bank was reviewing its policies regarding the banking system in Israel following the Trade Bank and Industrial Development Bank affairs. The Bank of Israel will draw conclusions "pertaining to deposit insurance or the competitive structure of the sector," he said.
Klein also emphasized that the central bank "is reconsidering all of the things in which policy should be revised in order to bolster the stability of the financial system in general and the banks in particular."
