Bank of Israel Governor David Klein did good yesterday when he announced his intention to ask the government to guarantee accounts at the troubled Trade Bank.
The move is a good one not just because of the personal losses at the bank, but also because of the need to restore the public's confidence in the Israeli banking system. In the absence of formal account insurance, the only way to safeguard public savings from the collapse of a bank is through such state guarantee.
In some way, Klein's announcement also shows that the central bank accepts a certain degree of responsibility for the embezzlement. The failure may lie first and foremost with Trade Bank's management, its board of directors and its accountants, but it is equally clear that the supervisor of the banks has lessons to learn.
A very palpable danger fluttered before the eyes of Klein and the banking supervisor, Yitzhak Tal, yesterday: Despite the fact that Trade Bank's collapse would not seriously impact on any other bank, the fall of one small player could have significant, indirect ramifications for the entire banking system. If the public comes to the conclusion that the state will not guarantee its savings accounts, then it will lose faith in the banking system at large and panic could ensue, as individuals rush to withdraw their savings. Such a scenario would create immediate liquidity problems; and the road from there to true financial turbulence is but a short step.
While the central bank was prevaricating yesterday morning, saying we should all learn lessons from the case and take the necessary steps, prior to any government intervention on behalf of Trade Bank's clients, the reports that came in from other banks, along with the stock exchange falling, convinced the central bank that now, while the public is jittery, is not the time to dilly-dally over decisions.
The Bank of Israel was not facing an easy dilemma. On one end of the scales sat the possibility that the state would be bailing out accounts at a bank at which a serious scam had taken place, possibly with the involvement of some of the bank's clients. Had it been clear from the start that there was no connection between the bank and its clients, then this decision could have been made much sooner. On the other end, however, sat the central bank's fear of making guarantees "automatic", thereby only motivating managers of other banks to take riskier steps, knowing that at the end of the day, the state will sign a blank check in any case.
The solution is to withhold guarantees from any deposits belonging to those involved with the fraud, as well as the deposits of the major shareholders in the bank.
In the coming months, the Bank of Israel will be drawing up the lessons it has learned from the Trade Bank case. We can expect a beefing up of the banks' internal checking system, with an emphasis on deeds of deception and fraud. Members of the banking supervisor's office whose role was to keep an eye on Trade Bank may come in for special investigation. Tough personal conclusions may be drawn against Trade Bank's management and directors. Its accountants will come under scrutiny too. And while all this is going on, the entire mechanism of insuring bank deposits should get another look over.
To establish such a mechanism, the central bank should rank banks according to their standing and charge premiums according to their levels of risk. If a higher interest rate tempts a customer to deposit money in a bank that does not have a checking system, or has ties to some shady characters, then he may do so, but he should pay the insurance for it. Otherwise, we will all end up paying for those customers and their financial adventures.
Remember, their profits are our risk.
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