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Bank of Israel Governor David Klein is about to appoint a new supervisor of banks. The governor is deliberating between appointing an external candidate or temporarily appointing the current deputy supervisor Yoav Lehman as acting supervisor. If Lehman is the choice, the appointment will almost certainly be temporary as Klein does not want to commit himself to a permanent appointment that could be shot down in the coming months by the State Comptroller, who is currently looking into the role of the supervisor of banks in the collapse of Trade Bank.

In any event, whether the next supervisor is an external appointment or comes from within the ranks of the Bank of Israel, his agenda will focus on the same fields:

1. Introduction of depositor insurance: This is a mission being dealt with by several departments within the central bank, however the supervisor of banks has a critical role in determining the insurance procedure. The banking sector has suffered several severe shocks in the last year and in order to regain the public's confidence, vigorous steps are required on this matter.

2. Mergers: More and more bankers believe the Israeli banking system is big enough for only three banks. This may be an exaggeration, but there is certainly room for mergers between small and medium banks that would enable the creation of larger and stronger banking groups. The supervisor of banks must create incentives to encourage major shareholders of small banks to merge.

3. Accounting: The successful battle waged by the heads of the banking system against Accounting Standard 15, which may have required them to shake up their credit portfolios, showed just how deeply the banking sector fears a painful acceptance of reality. Recognizing the decline in the value of their assets at a time when price levels on the stock exchange are at rock bottom is indeed problematic, but ignoring market values is no less problematic. The new supervisor will have to find a way of preventing the banks from ignoring reality.

4. Dividends: The year began with the incumbent supervisor, Yitzhak Tal's, recommendation not to hand out dividends still standing. Judging by the banks pessimistic forecasts for next year, there is no reason to revoke that recommendation, but the controlling shareholders will increase the pressure to hand out dividends. The new supervisor will find himself in a dilemma whether to look out for the stability of the banks or for the interests of their owners.

5. Credit audits: Of all the credit failures of the banks in the last two years - Tevel, Gad Ze'evi, Gilat and Peled-Givoni to name a few - not a single company collapsed because of the intifada. The damages caused by poor decisions taken by the banks could have been narrowed had the supervisor of banks carried out more frequent audits.

6. Public relations: It is no secret that the incumbent supervisor did not make a sufficient effort on the PR front - in fact he is the first to admit it. The public is unaware of most of the steps taken by the supervisor. Information about measures taken by the supervisor and information about the supervision of banks, its role and the tools at its disposal, could be of assistance in improving the function of the supervision no less than another audit or another new instruction.