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Migdal Insurance is negotiating the purchase of the Ofer family's 26 percent share in United Mizrahi Bank. The insurance firm's initiative to invest in the bank was originally conceived about a year ago, but was put on ice. After it transpired that Migdal would not be allowed to bid for the controlling share in Bank Leumi, the company renewed its interest in Mizrahi, and has apparently received a green light from the Antitrust Authority to go ahead with the deal.

However, the deal's execution is still quite distant, since even given the present situation, there are many questions regarding concentration in the banking and insurance sectors.

The sectors are two of the local economy's most concentrated. The country's three largest banks and three largest insurance companies control over 80 percent of the market in their respective sectors. Competition between the insurance and banking sectors is still minor, in particular with regard to credit. Although insurance companies have large financial reserves, they usually do not extend loans and threaten the banks' hegemony in that field.

In addition to general considerations, any Migdal-Mizrahi deal would raise specific considerations.

First, Leumi holds a 20 percent share in Migdal, which raises concerns that Leumi's representatives on Migdal's board of directors would receive information on Mizrahi activities once Migdal had become a major shareholder in the bank. Regulations should therefore be enacted to prevent Leumi from receiving access to such information. How can this be done? The best way is to prohibit Bank Leumi from appointing representatives to Migdal's board, thus rendering any investment passive. The question is will Leumi agree?

Second, Migdal has a 9.5 percent share in Bank Leumi. Should an insurance company that deals with risk management be a major shareholder in two of the largest four banks in Israel? Of course not. So Migdal will have to sell its holding in Bank Leumi.

Third, the question arises as to whether it is appropriate for an insurance company to hold a 26 percent share in a bank. Banks are allowed to hold up to 20 percent of the equity of a real company, including insurance companies. The reason for this limitation is the need to restrict the influence and strength of banks and also to reduce conflicts of interest and the risks banks are exposed to. The question that needs to be asked is whether restrictions should be placed on insurance companies' holdings, as is the case with banks, since both are engaged in identical activities, namely risk management.

There are many models in the West of cooperation between insurance companies and banks. One of the most common is insurance companies' holding banks. In Israel, at least for the moment, the only model that exists is banks with holdings in insurance companies. Bank Hapoalim has a 20 percent share in Clal Insurance, Bank Leumi has a 20 percent holding in Migdal, and Israel Discount Bank has a 20 percent share in Harel Insurance.

The possibility that an insurance company will hold a share in a bank should be welcomed given the number of banks up for sale in Israel and the lack of potential investors, but there is a need to ensure that the connection between these two highly concentrated sectors will not erode the competitive potential between them.