Viewpoint / Riddled With Conflict

A top official involved in regulating the capital market couldn't hide his shock at the Bank of Israel governor's suggestion to cultivate the insurance companies as competition to the banks.

"The insurance firms?" he snorted. "They're light generations behind the banks in service and transparency. I've been chasing one a year and a half to get a report on my policy and can't get it. Any report that I could get automatically at any ATM, my insurance company hasn't been able to supply for a year and a half. And they want to buy the provident funds from the banks."

The insurance companies have certainly not endeared themselves to their clientele. But, the basic question is whether they are the answer to breaking the banks' dominance in the capital market.

To answer that, we have to differentiate between two problems arising from the banks' activities in the capital market. One is their dominance. They control the market via the mutuals and provident funds they own while also serve as the single real source of credit. That gives them control of all fund-raising. The banks extend credit to companies, sell them to the public (wearing their underwriting hats), buy the shares (as managers of institutional investors) and also advise the public how to invest.

But the insurance companies have dominance issues of their own. In almost all the insurance sectors, there are one or two companies that hold sway.

The banks are not alone in having a problem with conflicting interests. The insurance companies sell insurance, extend credit to companies (limited amounts, though), manage the money their customers deposit in insurance programs and manage mutual funds and provident funds.

The third alternative to the banks, namely the brokerages, are also tainted with conflicting interests.

It is unlikely that forcing the banks to relinquish their fund holdings would solve the problem of conflicts of interest. All it would accomplish is to shift the conflicts to somebody else. Nor is the issue of dominance a straightforward one, since giants like Migdal Insurance and Clal Insurance would probably not advance the cause of competition by buying investment funds from the banks.

The solution to the market's structural problems isn't going to be a simple one. A complex answer is needed, which will allow some insurance companies to buy some financial assets, while others will be prohibited. The banks will probably retain some financial assets, and brokers will constitute part of the solution too, conditional on regulation overseeing them also - to a far greater degree. The solution may not solve all the market's ills, but it will alleviate some of them.