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The board of Bank Hapoalim decided this week to merge the bank with its small subsidiary, the Mishkan mortgage bank. Mishkan's branches are already located within those of Bank Hapoalim, and in light of the pressing need to streamline, a merger is the natural step to take.

Within the next few days, Hapoalim's management will start negotiating with Mishkan's union to determine the number of workers who will be laid off, as well as their severance packages. The merger will save the bank the wages of Mishkan's administrative staff - some 150-200 persons. As part of this plan, Hapoalim may also offer some of its own employees compensation packages for early retirement.

For many years, the banking sector has enjoyed a high profit margin and managements could, therefore, easily offer generous early-retirement packages of up to 300 percent the severance pay legally due. The managers explained that this was in fact an investment, since early retirement pushed out high-wage earners that contributed relatively little.

But 2002 is, and 2003 will be, tough, with a sharp fall in profitability, large provisions for doubtful debts and low yield on equity. Consequently, the banks cannot distribute dividends to shareholders. The controling shareholders of Hapoalim are now in a bind, because they were banking on the dividends they would get in order to repay the loans they had taken to buy the bank.

Under these circumstances, will Bank Hapoalim and the other banks continue to offer such generous early-retirement packages as before? Will the voluntary retirement method be maintained? Or will the term "layoffs" be introduced to the banking sector for the first time in the last 10 years?

These are the questions that are now concerning Mishkan's union. The same question may be nagging the workers of Leumi Mortgage Bank, if the parent company, Leumi Bank, decides on a merger.

For many years Hapoalim has prided itself on having the best labor relations in Israel, and has boasted its industrial quiet as one of its prime accomplishments. It was easy for Hapoalim to keep things quiet, simply because it had the means to pay to keep it so. Since Hapoalim and Leumi have, to a great extent, set the standards for the other banks, anyone who retired early from the banking sector enjoyed the most munificent compensation packages in the country.

It seems, however, that 2003 will be a test for the long-standing organizational tradition of the banks, according to which no one is fired and 2-3 times the due severance pay is given in order to get workers to go home.

The more the economy deteriorates, the more necessary it will become to adopt the effective although brutal American streamlining methods, they say in the industry. To uphold their organizational tradition, the banks have to secure new sources of income and generate more revenues from their existing client pool. If they don't, they will only be able to offer compensation that is more down-to-earth.

Which will it be? Probably a bit of both; but the final outcome depends on the balance between the unions' negotiating power and the clients' passive outrage.