After many years in which the state registered revenues from the banking sector, both from privatization and taxes, the Finance Ministry finds itself in an unfamiliar position: The banks are causing the state heavy losses.
Israel Discount Bank is asking for a cash injection of NIS 500 million so as to improve its equity and continue with its business operations; the treasury has had to dig NIS 200 million out of the state coffers to compensate depositors who lost their money in the collapse of Trade Bank; and Industrial Development Bank of Israel is expected to announce a loss of NIS 100 million for the second quarter 2002, leaving it facing an equity problem that will require a NIS 200 million cash injection.
While in the case of Discount Bank, money can be raised by selling off one of its assets (its New York branch), in the case of Industrial Development Bank the situation is more complicated.
Industrial Development Bank, which is controlled by the state and the three big banks, has fallen into every possible pit in the last two years. It has extended loans to the Peled-Givony group, Gad Zeevi and a number of other companies that have run into difficulties. The Bank of Israel is demanding that the bank stick to its capital adequacy ratio (the ratio between the bank's equity and its risk assets) of 15 percent; however, its losses in the second quarter will bring it down to a ratio of 11-12 percent. Without an injection of funds, the bank will be unable to meet the central bank's demands.
A decision by the treasury on whether to provide the bank with the funds is not simple; it faces budget deficits that are forcing it, again and again, to cut expenditures, and Industrial Development Bank's situation is deteriorating from day to day and could leave the state facing an even more serious problem in the future.
The state faced a similar, but even more complicated, situation in the mid-1980's, when United Mizrahi Bank was on the verge of bankruptcy. For a number of years, the Bank of Israel extended credit lines to Mizrahi Bank, enabling it to restructure and recover. Mizrahi Bank is now one of the most profitable banks in the Israeli banking industry and is a worthy competitive option to the big banks.
This is not the case with Industrial Development Bank. The bank does not contribute a thing to competition in the banking sector. In fact, it is a burden on the state - a small bank supported by the equity the state has put at its disposal. Its ownership structure is complex; its credit portfolio is dreadful; and the involvement of politicians in its management is deep.
For years, the bank was a playing field for politicians and its employees who milked it until they brought it to its current state. The bank's employees have enjoyed the highest salaries in the banking sector - NIS 28,000 a month on average. These are just a few of the reasons that have adversely affected the bank's situation in recent years.
Given the bank's position, it would seem that every shekel pumped into the bank is a waste of the public's money. Even though new management has been appointed for the bank, nothing basic has changed, and the bank's complicated equity structure will make a quick privatization of the bank difficult. Therefore, the only way to go will be to sell its loan portfolio and deposits to other banks, even if the price is low, and to leave discussions between the shareholders on their share of the proceeds to a later date. Any other solution could cost a lot more.
If, in the future, the state wishes to pump money into banks that run into difficulties, it would be better off doing so with more important banks than Industrial Development Bank. The way the economy looks at present, the state will have the opportunity to do just that.
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