The Bottom Line / Not far enough
No true competition exists in the banking sector. However, there is an abundance of competition to manufacture recommendations for managing over-centralization and conflicts of interest between the banks, provident funds, and mutual funds.
No true competition exists in the banking sector. However, there is an abundance of competition to manufacture recommendations for managing over-centralization and conflicts of interest between the banks, provident funds, and mutual funds. Two different advisory commissions are simultaneously working hard to formulate recommendations for reforming the capital markets, which would include solutions for separating the mutual and provident funds from the banks.
Finance Ministry Director General Yossi Bachar heads a treasury commission, while his predecessor, David Brodet, heads another commission appointed by the Israel Democracy Institute and the Knesset Finance Committee. The goal is to compile a position paper for the July Caesaria conference. In addition, MKs Amnon Cohen and Yitzhak Cohen of Shas have submitted their own bill for severing the funds from the banks without waiting for any commission.
The Bachar commission included veteran voices calling for total separation. Yet talk elsewhere involves mini-compromises that would allow the finance minister to put a feather in his reformer's cap and the banks to get off the hook cheaply. The Brodet commission, which led several past reforms, has from the start been marching along the path to compromise. Pretty distorted, one might say.
Brodet's principal recommendation is to reduce the banks' share of the pension funds from the current 100 percent to 25 percent, in hopes that international investment banks or financial management firms will pick up the other 75 percent. This solution is Brodet's dream, but he lacks any guarantees from foreign investors to fill the local banks' shoes.
Brodet knows his recommendation is nothing but a first step, and the road to finding an optional solution is long. At this point Brodet seeks a feasible solution, not a prize winning comprehensive solution that cannot be implemented.
Brodet's recommendations do not solve the conflict of interest problem nor the over-centralization of power in the capital markets - rather, they only lead to more regulatory intervention. The percentage of the banks' share in the funds is irrelevant as long as they are clearly in command. Brodet's recommendations fail to address this issue. Consider Bank Hapoalim. If it holds 25 percent of Gadish while the remainder is spread across a myriad of investors, it is clear that control will remain in Hapoalim's hands. Brodet's solution is to invest the Supervisor of Banks with veto authority over the appointment of fund directors, in a manner that would limit bank intervention in their management. This recommendation would increase regulation in the sector and would burden the supervisor with unprecedented responsibility for seeking suitable candidates. This step is unnecessary.
The main advantage of Brodet's recommendations is the attempt to jumpstart the disengagement process of the banks from the funds, to open the way for new players in the sector and to hope that alternative management bodies are on the horizon. If anything, Brodet will accelerate the final process of reform - the total severing of the banks from the mutual and provident funds.