The Finance Ministry and Bank of Israel will remember this week for a long time. Arriving for work on Sunday morning, Accountant General Nir Gilad and Supervisor of Banks Yitzhak Tal received very bad news about what was going on at Industrial Development Bank. Panicked depositors were withdrawing their savings. The main player was investment company Gmul, which yanked NIS 140 million last week. The pace of withdrawals raised fears in Bank of Israel's banking supervision division, which remained in constant contact with Industrial Development Bank.
Gilad, Tal and their staffs powwowed to come up with solutions for the financial institution's worsening situation. They hoped to meet two, apparently conflicting, goals: the first, to apply a tourniquet to the bleeding withdrawals, and the second, keep the state from injecting capital into the bank.
In the early evening, it was decided to summon the CEOs of Israel's two largest banks, Hapoalim's Eli Yones and Leumi's Galia Maor, and try to devise a plan to prevent Industrial Development Bank's collapse. The two knew that the alternative was the appointment of an administrator, a far worse option from the perspective of the clients, the shareholders, and maintaining the image of the banking sector.
Yones and Maor arrived late in the evening at Gilad's offices, where they were asked to suggest ideas and detail their conditions for accepting responsibility for the small bank's credit portfolio.
The question quickly arose of whether the state was willing to grant the two big bank guarantees in the event Industrial Development Bank's credit portfolio turned out to be especially problematic. Maor and Yones, who are already dealing with credit problems of their own, sought to minimize the chances of ending up with a pig in a poke. Both declared they would consider acquiring the credit portfolio only after a careful examination of its assets and liabilities.
Yones and Maor were also asked if they could provide Industrial Development Bank's liquidity needs, but they again responded they were interested in state guarantees.
Galia Maor even had an interesting request: she expressed her interest in buying Union Bank and the Industrial Development Bank portfolio in a "package deal." Gilad and Tal saw that as an attempt to exploit their distress and refused to discuss the request.
After finishing their pizza and fruit dinner, the bank chiefs went on their merry ways, and Gilad and Tal were left with the Government Companies Authority trying to find a way out. At this late hour, they already knew that reports of the meeting had leaked to the press so it was clear they had to find an immediate solution to end the withdrawal panic.
Close to 2 A.M., it became clear that there was no other option than selling the loans and deposits to other banks, and, since this would be a long process due to the examination procedures necessary to price the portfolio, it was decided that Bank of Israel would supply credit lines to the bank to cover its liquidity problems.
Gilad, who had consistently refused to increase state exposure to the bank's possible collapse, decided that the state would also do something for the good of the depositors and announced he would mortgage the state's deposits in the bank to the Bank of Israel, enabling the central bank to inject credit into Industrial Development without fear.
Yesterday morning, Industrial Development chairman Ra'anan Cohen was told that the bank's situation necessitated the sale of its asset and liability portfolios. After completion of the sale, the bank will be closed, and Cohen and the rest of its management will lose their jobs. A treasury source said Cohen grasped the situation very quickly and undertook to convince the bank's directors that there were no other options. The treasury and the central bank assume that the big bank's professional collection units will be able to get more from Industrial Development's problematic credit portfolio than the latter's staff.
It was decided to establish a data room in which bidders can receive details of the bank's situation prior to possible acquisition of its operations. The bank will operate as usual to collect debts in the four-to-five months required for this process. The treasury prefers to sell the entire portfolio to a single bank.
The treasury and central bank yesterday expressed satisfaction with the arrangement and hoped it would help curb the wave of withdrawals from the bank. CEO Uri Galili yesterday expressed satisfaction withe the arrangement, even sounding optimistic. "The arrangement should calm depositors as the state and the Bank of Israel have undertaken to grant the public preference over the state. The bank is on track to close but it should be noted that there were plans to privatize it anyway."
Many of Industrial Development's 2,800 clients have been very concerned about the bank's possible collapse and almost anyone with liquid funds in the bank has withdrawn them. Many others even broke savings schemes, paying heavy fines, if only to save the lion's share of their deposits.
A senior banking source said yesterday that what has been happening at the bank is proof that no supervisor of banks or other regulator is able to deal with the phenomenon of a run on a bank. "When it happens, no one can stop it. We didn't see people flocking to the branches, because the bank has no branches, but this is a concrete example of a run on a bank and proof it can happen any time, any place, even in Israel."
Want to enjoy 'Zen' reading - with no ads and just the article? Subscribe todaySubscribe now