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Bank Leumi may keep its shares in the Migdal insurance company, after the Knesset plenum approved an amendment to the laws governing Israeli banking earlier this week. That is to say that the amendment passed its first of three readings into law. The change will become final only after the next two readings.

The change to the law relaxes the rules governing the holdings banks may own in non-bank companies - manufacturing companies, for example, but mainly insurance companies.

It's become known, tongue-in-cheek, as the Migdal Amendment, because its immediate effect would be to allow Bank Leumi to keep its stake in Migdal, the biggest insurance company in Israel.

Under the present banking laws, Israeli banks may not own holdings in more than one conglomerate at a time. A company is defined as a conglomerate when it operates in three or more different sectors. At present insurance companies meet the legal definition of a conglomerate.

Under the amendment, a holding in an insurance company would not be considered a holding in a nonbank conglomerate.

The bill passed unanimously, with the support of 16 Knesset members.

The original law restricting bank holdings in nonbank companies dates from the late 1990s. Following the Bachar Reform of a couple of years ago (designed by a commission headed by the then director-general of the Finance Ministry Joseph Bachar) cross-holdings between banks and insurers were capped.

Under the reform, banks were forced to sell their holdings in provident and mutual funds. They were also specifically banned from owning more than 10% of any insurance company, and insurance companies were prohibited from owning more than 10% of any bank.

As noted, however, insurance companies are defined as conglomerates. Therefore, a bank may not own shares in an insurance company (even if it owns less than 10%) if it also owns shares in another conglomerate.

Which Bank Leumi does. It owns 20% of Israel Corporation and 9.9% of Migdal. Both are conglomerates. Under the law Leumi is supposed to sell one of these holdings. If forced it would sell the Migdal shares before the Israel Corporation shares. But the bank received special permission from the Supervisor of Banks at the Bank of Israel to keep both holdings for the time being, while the amendment was being hammered out, as long as it placed the Migdal shares in trust.

The amendment indeed resolves the problem, by redefining Migdal's status as a not-conglomerate. Insurance companies will be considered just insurance companies, ignoring their holdings in other companies and sectors.

At first the Finance Ministry opposed the amendment. It didn't want banks to be able to buy up to 10% in a number of insurance companies, which would violate the spirit of the Bachar Reform. So another restriction was introduced into the amendment: A bank could own more than 1% of the controlling interest in only one insurance company.

While about it, there's another amendment to the law. A bank may own shares in one conglomerate, and up to 1% of the stock in other conglomerates as well.