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Financial statements for the first six months of the year published last week by the banks gave none of them anything to smile over, with the exception of one column - their nominal financial results, or results not adjusted for inflation.

Of all the institutions in the economy, the banks are supposed to be the primary beneficiaries of the transition to nominal reporting planned for 2003.

In order to understand the significance of the move from the banks' point of view, one need only glance at the figures.

In the first six months of 2002, Bank Hapoalim reported a net profit of NIS 442 million. If the bank had reported its nominal results, its net profit for the period would have been NIS 1.04 billion - a staggering NIS 600 million more than it actually posted for the period in question. Bank Leumi would have reported a nominal profit of NIS 844 million, rather than an inflation-adjusted figure of NIS 304 million.

And Israel Discount Bank and the First International Bank of Israel would have gone one better, converting losses of NIS 124 million and NIS 148 million respectively into profits of NIS 78 million and NIS 4 million respectively.

The main reason for the enormous discrepancy between nominal results and inflation-adjusted results is the exceptionally high Consumer Price Indexes registered in the first six months of the year.

Within the next few weeks, the Accounting Standards Council is scheduled to make a final decision on the transition to nominal financial reporting as of 2003. The head of the council, Professor Eli Amir, said recently that he will support the transition to nominal results if the inflation forecast for the next twelve months is in single digits.

Amir's view reflects the desire to bring Israel's accounting standards into line with those of the rest of the world. They relate to the economy as a whole and not specifically to the banking sector.

If Amir's position is accepted, the Bank of Israel will find itself facing a problem. On one hand, the central bank, as part of its traditional policy of striving for price stability, is among the prominent supporters of a transition to nominal reporting. On the other hand, there are fears that the transition to nominal reporting will increase the banks' ability to hand out dividends, thus dwindling their equity and undermining their stability.

In recent months, Supervisor of Banks Yitzhak Tal has stated that he objects to the banks handing out dividends, given the already delicate state of the banking system. If the banks had published nominal reports this year, they would have been able to hand out as a dividend the difference between the nominal result and the inflation-adjusted result.

In other words, a technical change of accounting laws with no significance for actual cash flow would have enabled Bank Hapoalim to hand out a dividend of NIS 600 million.

How will the Bank of Israel solve this dilemma? There are two apparent solutions. The first is to support a one-year postponement of the transition to nominal reporting until the economic situation becomes clearer. The second is to support a transition to nominal reporting, but to prevent the banks from handing out dividends if the improvement in their results is merely due to ceasing to adjust them for inflation.

Either way, the central bank may well find itself perceived as inconsistent.