Taking Stock / Dangling a giant carrot
Where are the bankers?
In a month, the team headed by treasury director-general Yossi Bachar will be delivering its conclusions about reforming the capital market. The reform centers on severing the banks from their provident and mutual funds. Yet the bankers are staying mum.
The banks have good reason to shut up. In the wings, they are feverishly negotiating with the Bachar team, sending messengers, pushing opinions, taking pulses.
At this stage, the bankers don't want to attack the Bachar team, or to declare clear-cut stands on the issues at stake. Before they consolidate their campaign, they want to understand what they are facing.
There is another reason. The bankers know the Bachar panel isn't only brandishing a big stick. Behind its back, it's also got a big carrot. A very big carrot.
The Bachar team is about to propose that Israel's banks be allowed to sell insurance, of all types and kinds. That would be a dramatic change in the regulation, which currently forbids the banks from even dreaming of selling or distributing insurance products.
Though the public may be less fixated on the insurance sector, it's a vast source of wealth that has created five giant companies with a combined market value of $3.5 billion. It has also kept thousands of insurance agents in clover all these years.
A means to an end
Letting the banks into insurance is likely to be a key point in the Bachar recommendations. The team views insurance not only as a giant carrot that will dampen the banks' opposition, but also as an effective way to expedite implementation of its recommendations.
According to the forming plan, the banks would have three years to separate from their provident and mutual funds. But the advantage is that the sooner a bank complies, the sooner it can get into insurance. First to get out will be first to get in.
The Bachar team hopes competition to be first to offer insurance will induce the banks to shed their provident and mutual funds without delay, instead of waging a war of attrition with the regulators.
Distracted by the juicy carrot, the banks are studying the ramifications of getting into marketing and distribution of insurance. Some already had contingency plans that they're simply dusting off.
Wrong, and wrong again
Anybody who thought the Bachar team's purpose was to weaken the banks was wrong on two counts. First, once divorced from their provident and mutual funds, the banks will be free to hawk and distribute all kinds of financial instruments. Most of the profit could well lie in marketing and distribution, not in management.
Second, the marketing and distribution of insurance products is a massively lucrative occupation. Billions exchange hands. Just to understand how big it is: Insurance agencies pay the insurance companies NIS 5 billion a year in fees. At least a third of that would be highly relevant to the banks.
One capital market source said last week that one of the banks compiled an economic study, showing that the new order in the capital market, divorcing the banks from asset management but turning them into marketers and distributors of financial instruments, not only won't hurt their profits, it will enhance them.
Allowing the banks into insurance distribution will trigger dramatic change in the financial arena. But it also arouses a whole slew of new issues.
* The sector of insurance agents faces upheaval. Agents incapable of offering real added value to clients or to insurance companies will go extinct.
* Insurance companies will have to offer a wider range of products. They will have to offer simpler products that distinguish between various insurance components.
* Any dreams the insurers and bankers may have entertained about horizontal integration (bank-insurance mergers) must be put back on ice. A lot of ice.
* Assuming the Bachar team doesn't want to create new conflicts of interest, it will have to adopt the position of the Bank of Israel regarding utter separation of the banks and insurance companies.
* The Hydra-headed move of banning the banks from asset management, while allowing them into insurance products, will change the capital market beyond recognition. It will change the usual distribution of functions. Yet it's a pretty safe gamble that the banks won't be losing any of their power. Nor will the insurance companies. Probably quite the contrary.
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