The Bottom Line / Court between the two
The principle concern of the governor of the Bank of Israel, David Klein, and the supervisor of banks was to prevent a "run on the banks," so they decided promptly at the beginning of the week to recommend that the government give full guarantees on money deposited at the Trade Bank.
The principle concern of the governor of the Bank of Israel, David Klein, and the supervisor of banks was to prevent a "run on the banks," so they decided promptly at the beginning of the week to recommend that the government give full guarantees on money deposited at the Trade Bank, excluding those accounts linked to the embezzlement.
They feared a chain reaction, with those with monies in small banks rushing to withdraw their deposits, thereby throwing the small banks into financial difficulties and dragging a general and devastating hysteria in the wake.
This fear developed worryingly on Sunday morning, when the large banks refused to extend their credits with the small institutions, prompting Klein to declare an immediate increase in the credit opening within the banking framework (through monetary quotas) and the granting of guarantees on that same day, despite the fact that only the night before, on the Meet the Press television program, he had said that the checks would take several days, and only then a decision would be made.
But apart from this consideration, another concern lurked. The moment the government gives a full guarantee on those bank accounts (excluding any connected to the fraud), the central bank is relieved of the grave danger of being sued for negligent supervision by all those innocent account holders who thought that banking supervision really meant supervision. Once these individuals get their money, they won't bother the courts.
But if the matter is brought to a close with compensation paid for by the taxpayers and settlements reached with the bank's accountants and its managers, then we will never know exactly what happened at the Trade Bank, who truly was responsible and who was negligent. This would only come to light through a lawsuit that goes the full monty, that puts everyone on the witness stand, that investigates the Bank of Israel's supervision team responsible for Trade Bank.
And maybe then it would transpire that the supervision is antiquated and conservative. Maybe it would then become clear that it is not sufficient to check if all the paperwork has been done correctly, but rather to put a bit of thought into it. For example, how could about half of the loans be deposited in deposit accounts and not arouse some suspicion from the investigators? That's a loss-making deal for starters.
So how could the two considerations - stability of the banking system with an investigation of the truth - be met? The government could decide that it will pay up for every deposit in the bank up to a certain limit, say NIS 5 million or NIS 10 million. Then the vast majority of the account holders would get their money back. But it would leave some with no choice but to sue, and the whole scandal would be ironed out in public.
This would kill two birds with a single stone: The public would understand that it cannot deposit its cash in any bank without checking or investigating, thereby greatly improving the management and the supervision or closure of small banks. Likewise, following the disclosure of the facts through the courts, every review process, including the supervision of the banks, would be forced to do its homework, and this should prevent the next collapse.