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The Bank of Israel's decision to forbid insurance companies competing for control of Israel Discount Bank caused a stir in the sector yesterday. Some of the leading lights - such as Yair Hamburger who controls Harel, Menahem Gurwitz who controls Menorah, Migdal lead by the Italian insurer Generali - had all taken a great deal of interest in Discount, and in one fell swoop the central bank had laid to rest all their dreams, paving the way instead for foreigners to take over.

In the past, the Bank of Israel allowed insurers to take control of banks, albeit with small holdings. Now, with this sweeping decree, the path is closed to insurers both large and small. Behind the decision lies the banking supervisor, Yoav Lehman, and the central bank governor, David Klein who would rather wait for the findings of a panel headed by the treasury director general Yossi Bachar on the preferred structure of the financial sector.

The team is supposed to cover such questions as splitting the provident funds from the banks, and the `incestuous' cross-ownership of banks and insurance companies. Bachar will probably concentrate on two or three recommendations, leading with the provident fund-bank divorce, but the Bank of Israel's instruction gives a heavy hint as to its position - that niggly pin-point recommendations are insufficient, and that some sweeping changes are required in Israel's financial world.

Klein has long hinted at his view of the problems: that the provident and mutual funds must be wrested from the banks, that banks be allowed to market insurance and pension products, and that the conflict of interests of the banks in underwriting and investment management be reduced.

The heavy cross-ownership in the financial sector, and the high domination of banking and insurance by a few giant players is, according to the central bank, a threat to stability, and an unending opportunity for conflict of interests in credit and investment services.

Banning the likes of Hamburger, Gurwitz and others from competing for Discount's control could jeopardize the bank's privatization by reducing the number of potential bidders. The central bank's message that it is trying to broadcast is that though the state's sale is important, even more so is the prevention of any conflict of interest in the capital and financial markets, and the creation of a firm and less concentrated infrastructure that will improve competition and reduce the risk of instability.

Now if Bachar and Finance Minister Benyamin Netanyahu are interested in seeing Discount's privatization succeed, then they should internalize Klein's hinted message and adopt broader recommendations for the sector, affecting marketing, distribution, credit, cross-ownership and the collapse of the banks' and insurers' control of various activities in the capital market.