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The biggest fantasy of the treasury and central bank these days is setting up a third banking corporation - a large, powerful group that would offset the power of the Bank Hapoalim, Bank Leumi duopoly. Everyone is talking about it, everyone is advocating mergers of medium-sized banks, but no one stops to ask if this is even possible, or what would need to be done for the fantasy to come down to earth.

A letter of reprimand the finance minister sent this week to the governor of the Bank of Israel about Bank Otsar Ha-Hayal provided an interesting insight into the difficulties of creating a third banking group. "I was surprised to see in the press after our meeting that the treasury advocates allowing Bank Hapoalim to keep its holdings in Bank Otsar Ha-Hayal," Benjamin Netanyahu wrote.

He reminded governor David Klein of a government decree in 1993 that compels large banks to part with their holdings in medium-sized banks. It was decided that Hapoalim would sell its stake in Otsar Ha-Hayal, Leumi would liquidate its share in Union Bank, and Israel Discount Bank would say its goodbyes to Mercantile. In the 10 years since, only Leumi has complied.

Hapoalim was to sell its stake in Otsar Ha-Hayal by the end of the year, but two years ago got the approval of the treasury director general, Ohad Marani, to hold on to its stocks until 2005. Instead of turning to his own director general, Netanyahu chose to scold the governor of the central bank and said "the separation of Bank Otsar Ha-Hayal is a mandatory step toward creating a third banking group."

It yesterday transpired that Netanyahu and Marani are not fully in sync and Bank Hapoalim will indeed be allowed to maintain its holdings in Otsa Ha-Hayal until 2005. The treasury zig-zag can apparently be traced to harsh exchanges between the bank's leaders and the treasury over the last two days, but is also due to the situation of potential buyers.

There were surely those in the treasury who asked themselves if this was a good time to force Hapoalim to sell Otsar Ha-Hayal. The situation of medium-size banks in Israel is such that buyers may be hard to find, even though Otsar Ha-Hayal has a very impressive list of clients that any bank would covet.

Israel Discount Bank, for example, which is supposed to be a major component in the third banking group, depends on capital injections. In the last year the treasury has repeatedly rejected Discount's requests to issue more stock on the market or to sell one of its assets to raise more money.

As for medium sized United Mizrahi Bank, discord between the partners, Muzi Wertheim and the Ofer family, is so bad that they want to dissolve the partnership. This is certainly no time for acquisitions as far as they are concerned. First International Bank of Israel is now changing hands from the Safra family to Zadik Bino, so that new acquisitions in the near future are out of the question here too.

The concept of setting up a third banking group makes perfect sense, but its implementation would require a complicated partnership between a government-owned bank (Discount) and privately-owned banks, as well as a capital injection to finance the project.

The only way to get this done in the near future would be for the government, as the controling shareholder in Discount, to inject capital into the bank that would enable it to finance the acquisition of another bank.

With the current budget restraint policy, this seems highly unlikely. It is therefore reasonable to assume Netanyahu will support another extension for Hapoalim in the sale of Otsa Ha-Hayal, despite his public rebuke of Klein.