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Bank of Israel Governor David Klein ruined central bank spokesman Danny Yariv's weekend. Klein, in a Friday interview with Hebrew-language daily Ma'ariv, said that the collapse of a major bank was not inconceivable. The comment led to market jitters and it was clear that without a clarification - something at which the Bank of Israel is very adept - these nerves would impact yesterday's stock market trade as well. The Bank of Israel went into alert mode, and Klein tried to repair the damage that same day in a lecture to a Tel Aviv business forum, where he said he is not worried about the stability of the banking sector. On Saturday, Klein said on the radio that Israeli banks are in good shape.

The market response to that calming message was evident yesterday in the blue-chip Maof-25 Index's 3 percent fall. The major banks lost an average of 3.15 percent, and Israel Discount Bank slid by 4.2 percent. Shekel-dollar options trade was also jittery, and the close reflected a 0.4 percent depreciation of the shekel.

The governor's latest comment follows the blunders he made after the collapse of Trade Bank. Then, Klein said that small banks are riskier than large banks and even recommended that customers not trust their usual bank clerks but ask other employees if they notice discrepancies in their accounts. The comments caused a flurry and created a routine: gaffe by the governor, market jitters, central bank "clarification," damage repair.

Banking is an unusual industry, in which incautious comments in and of themselves can cause the collapse of a bank. It is therefore reasonable, especially in light of the markets' response yesterday, to complain about Klein. Nonetheless, it is also reasonable to ask whether discussions of the banks' stability should be left behind closed doors, or whether the public should be let in on the dilemmas and dangers.

The central bank's banking supervision division has operated on many levels in recent years to strengthen the sector's stability - by upping capital adequacy requirements, by demanding increased provisions for doubtful debts and by forbidding the distribution of dividends. Klein does not say it explicitly, but he apparently knows that the regulatory arsenal is limited, and that preservation of the sector's stability also requires some substantial macroeconomic policy moves.

The collapse of both Trade Bank and Industrial Development Bank offered clear-cut proof that regulation alone cannot prevent a bank from folding. The Supervisor of Banks can demand that controlling shareholders inject more capital if complications arise, but Klein prefers not to get to that stage. He is therefore trying to pressure the Finance Ministry into creating economic conditions that prevent complications in the banking sector.

The treasury does not like Klein's comments, and the capital markets like them even less. Butwhat should worry everyone is not a 3 percent slide in blue-chips, but the collapse of a major bank, which would cause far greater shocks. There is no doubt that lack of action by the treasury combined with lack of silence from Klein could cause just such an earthquake.