The story that the Bank of Israel doesn’t want told
Psst. The truth is, you won’t be paying lower service fees at the banks. You want to know why? Guy Rolnik tells you why
Last week the Finance Ministry sent a text message to Israel’s business reporters: “Huge success in sale of state’s shares in Discount Bank today. State of Israel sold 8.33% of Discount’s stock to Swiss bank UBS for NIS 552 million.”
What are we to understand from that “huge success”? What exactly is the great coup? Was it that the shares were sold for some extraordinarily good price? Was it some terrific increase in the bank’s value during the years the state owned the shares? Was the ministry perhaps referring to the privatization process as a whole? Perchance Discount drove progress and innovation in the entire banking sector? Was there some great success here?
You probably know the answer. The “huge success,” if any, was at most a technical one in that the state managed to sell the shares on the stock market. By any other economic parameter, the bank’s privatization was a very small success indeed.
The state sold Discount Bank in 2005 at a very low share price, and that price stayed very low over the years. In fact, minus its subsidiaries, mainly its bank in New York, Discount has been fluctuating between losing money and making a vanishingly small profit for years.
Last week the Bank of Israel’s supervisor of banks published his annual report. However you comb through it, you won’t find an explanation of Discount’s miserable profitability. The Bank of Israel’s report, meanwhile, is replete with data, analyses and tables, all very edifying to be sure. But the true story of the banking system isn’t there. The Bank of Israel has no particular desire to tell it.
Here are some items you will find in the report about last year.
• The banking system’s income from interest (the difference between the interest it charges on loans, overdrafts and so on, and the interest it pays on deposits) came to NIS 23 billion.
• The banking system’s income from service fees (all those fees you pay, for instance, when depositing checks and paying bills) came to NIS 16.1 billion.
• Salaries and other wage-related costs for the 47,000 employees of the banking system totaled NIS 14.5 billion.
If you read the business press, you’ve probably followed the titanic battle between certain Knesset members for or against the Bank of Israel regarding banks’ service fees. The Bank of Israel aimed to lower the burden on households. During economic and financial booms, you have also probably read newspaper articles about the banks’ sky-high profits.
All these stories are good ones, interesting too, but they don’t tell the real story of the Israeli banking system.
The reforms of Israel’s banks have not achieved, and probably never will, any significant reduction of bank fees or interest charges. That’s because the supervisors of banks over the ages have all known but don’t want to talk about the fact that the banks have a monster to feed, namely, their bloated staffs.
They have 47,000 hungry workers to keep in clover who cost NIS 14.5 billion a year directly. But in fact the cost of keeping them on the payroll is much higher. The cost of maintaining about 1,200 branches with their information systems, maintenance, management and general costs runs to another NIS 10 billion a year.
Most of the highest-paid bank workers are employed through collective contracts that give management no wiggle room at all. They can’t fire or move anybody.
Whyreform won’t happen
The banks have tremendous fixed costs that can’t be “managed,” which means that any reform aiming to lower fees and narrow spreads (whether through encouraging competition or by administrative means) would hit the banks’ profits.
How much of a hit to profit could the banks take? Not much. Looking at the issue over the long term, leaving aside bubbles and recessions, we find that Israel’s banks aren’t particularly profitable in terms of return on equity. Any real hit to their profits could destabilize the entire banking system.
When the media and the legislators view the banks through their elephantine income, they don’t see the story told by the banks’ costs.
The system has an army to feed − a vast, inefficient and untouchable army of workers. So the banks’ customers will just have to keep paying high service fees and high interest rates, because that’s how the banking system is built.
An inspection of one of the two big banks (Hapoalim and Leumi) last year found that about half the branch managers cost the system a million shekels a year, each.
That’s a very high wage cost when compared with their peers at other companies in the finance sector.
But the real value of the wage package given to a branch manager doesn’t boil down to a million shekels, it boils down to absolute job security − for the manager and everyone else at the bank. A sword probably hangs over your head, dear reader. It does over most salaried employees: the sword of dismissal, layoff, wage cut. But bank workers are safe until they’re 67 and they get a raise every year to boot.
So if you’re a branch manager at 47, the age at which most workers in the private sector start to fear for their futures, you look ahead and see gross cash flow of NIS 10 million or NIS 20 million, usually linked to the consumer price index.
Most other workers at age 47 look ahead and see an irritable boss, a terrifying job market and brash young up-and-comers breathing down their necks.
Most people in high-tech or any other sector know that at age 50 they’re likely to see the door, or at least their wage start to shrink. But the future of our man at the bank, and at government companies, is sweet and secure.
When you weigh that absolute job security into the equation, you must conclude that salaries at the banks are double or triple the going rate for comparable work anywhere else.
Here are some quotes that you won’t find in the supervisor of banks’ report, though we at TheMarker have in recent months.
A manager at one of the big banks: “Wage costs in the Israeli banking system are puffed up by 35% to 50%. Half that inflation is in salaries of veteran workers whose salary rises each year and who can’t be touched. The other half is in superfluous workers.”
The chairman of a big bank: “Surplus wage costs in the banking system are running at NIS 5 billion to NIS 6 billion a year. If we had the flexibility to manage things, we could cut costs at our bank by 40%.”
A former bank CEO: “We don’t really run the bank. The bank runs itself. We influence only a small part of its activity. The big money lies in places we can’t touch − our enormous workforce.”
The Bank of Israel doesn’t want to tell that story about the Israeli banking system. Its purpose is to keep the system stable. The status quo of almost no competition, in which monopolistic profit goes in large part to the workers, suits the Bank of Israel fine, as long as the banks keep enough of the money to stand firm. Naturally, the status quo suits the workers too.
The price the economy pays for this state of affairs isn’t only the heavy cost of banking services. The laggard, uncompetitive state of the banks is characterized by low productivity that infects the rest of the economy.
If the model in which monopolistic profits are doled out to a few tens of thousands of workers seems rotten to you, well, there are worse things out there.
There is the model of the Israeli cellular service companies. Like the banks, the cellular companies operate with practically no competition and rake in monopolistic profits. But the cellular companies, unlike the banks, feed their monopolistic profits mainly to their owners, not their workers. The chief beneficiaries are giant business groups. You could argue that their model is even worse than that of the banks.
There is a third model out there: that of the public sector, which has two types of workers. Some earn top shekel but don’t put a penny into their pension funds, and they have absolute job security. They too do far better than their peers in the business sector. Then there are the ones who earn peanuts. They also have absolute job security but at the end of the day make little money.
Neither type of worker has any incentive to become more productive or to innovate.
There is a fourth model, which you’ll find in high-tech and at many private, non-monopolistic companies: low job security, a cruel job market and strong incentives to improve productivity.
Are there other models? Yes. There’s a model in which all workers receive some protection, not only the ones sheltering in certain organizations.
It’s the model in which the government’s economic policy is focused on creating a dynamic labor market that creates jobs, maintains competition, trains workers, builds strong education systems, keeps the workers relevant, and helps them when they lose their jobs.
Israel’s economic debate is controlled by the players that benefit from the first types of models. The business chiefs benefit from the absolute flexibility of the job market; the workers protected by powerful unions at cartels, monopolies and the like are also well represented in the debate.
But most workers in Israel are not represented and few are warriors who fight the good fight. It would be refreshing if the Finance Ministry would stop sending text messages about empty coups and put the item that matters most at the top of its agenda: the job market and business environment in which most of the nation’s salaried employees have to exist.