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"The banking system has no problem with stability or survival, only with profitability," said Leumi Chairman Eitan Raff earlier this week when the bank's 2002 financial report was published.

Raff did not simply volunteer to characterize the stability of the local banks, but tried to answer a question that has been troubling banking customers for the past year, especially households, which provide the banks with their resources for credit.

Bank stability, which had become perceived as self-evident in recent years, is once again not so self-evident following a series of events and controversial statements during the past year.

The collapse of Trade Bank, the slow death of Industrial Development Bank, and problematic statements made by Bank of Israel Governor David Klein about the collapse of a big bank not being unimaginable, along with his preference for large banks over small ones, destabilized public faith in the banks, sowing among many depositors doubts and fears about the fate of their money.

All this was accompanied by reports of large sums of money the banks were setting aside to cover doubtful debts, major customers who became entangled in financial difficulties, and businesses that went bankrupt.

Customer concerns can be seen in the growing number of withdrawals being made from medium and small banks, the sharp drop in the share market value of the banks - which are all trading at dozens of percent lower than their capital holdings - and the large increase of financial transfers this past year to foreign banks.

The good news is that despite the banking sector's difficult year and the sharp erosion in profits, the banks managed to finish 2002 with improved signs of financial stability. The ratio between bank assets and their credit portfolios was 9.8 percent in 2002, up from 9.4 percent in the previous year.

The minimal ratio demanded by the Bank of Israel is 9 percent, and such growth indicates that the banks' reserves have grown, enabling them to continue to grant credit and erase bad debts, if necessary. In other words, they can continue making some small mistakes.

The growth in that appropriate measure of credit to assets is the result of a number of actions, including the ban on dividends imposed by the supervisor of banks, a halt to the rapid growth in credit portfolios, secondary equity raising by some banks, and, of course, the large reserves set aside for doubtful debt, which reduces risky assets and improves the credit-asset ratio.

In 2002, the five largest banks set aside a whopping NIS 7.3 billion for doubtful debts, up from NIS 4.6 billion in 2001, which was itself a difficult year. To understand just how large an amount was set aside for doubtful debt last year, take a look at 1998-2000, when the overall reserves totaled NIS 7 billion, less than what was reserved just for 2002.

The ability to absorb such large reserves and nonetheless retain, and even strengthen, the credit-asset ratio is an expression of considerable strength that could revive some of the confidence lost by the banks during the past year.

However, the lack of certainty in which the Israeli economy operates due to security concerns and overall difficulties in the economy still doesn't justify sounding the all-clear signal.

For the public's confidence in the banks to be totally restored, two key conditions must be met: the first does not depend on the banks but on economic policymakers - in the treasury and at the central bank - and their ability to heal the economy.

The second is entirely up to the heads of the banking system and their ability to make the banks, which still suffer from pockets of inefficiency, more efficient and to manage credit risks with wisdom.

The dilemma in the credit area is not simple, since putting an end to handing out loans could suffocate the business sector and aggravate things.

That's the challenge facing the banks' managers, for which they were paid last year - "the worst in their history," as some have said - an average monthly wage of NIS 290,000.