"We'll raise the interest rates," the bankers are crying because Yitzhak Tal, the Supervisor of Banks ordered them to increase their reserves for doubtful debts by 0.3 percent; and it immediately raises the question: Are they a cartel? Can all the banks roll the increased costs onto the customers? Should David Strum, the Supervisor of Limited Corporations open an investigation?
The bankers claim that Tal's order is "gross interference in the management of the banks." But the truth is the bank managers weren't careful enough and it's good the supervisor is intervening. That's his work - to make sure there's a an additional "security pillow" for times of trouble. And now is definitely a time of trouble, because we're going to be seeing more bankruptcies, not only in the construction and tourism industries but across the length and breadth of the economy.
Comparing the reserves set aside for doubtful debt by Israel Discount Bank compared to the rest of the banks, it turns out that Discount set aside twice the average of the banking system. But the credit portfolios of the other banks aren't twice as good as Discount's, proving the banks didn't set aside enough.
They set aside too little, because increasing reserves for doubtful debts means lowering their profits, and return on investment, and the minute that drops, the senior management gets smaller bonuses. Hapoalim CEO Amiram Sivan won't be clipping a glaring bonus of NIS 7.3 million and Shlomo Nehama, the banks' chairman and one of its owners, won't be able to take home a NIS 5 million bonus. That hurts. And the rank and file workers, who grew used to taking home one or two extra salaries a year as a bonus, won't get anything this year.
And as a result of a 9 percent limit on bank liquidity, the banks will have to limit the credit lines to the public, since the minute their profits are below one billion shekels, they have to reduce their loans by NIS 910 million - and that's not small potatoes. Furthermore, the drop in profits means smaller dividends for shareholders, and they need their dividends to lower their own debts resulting from the process of privatization, when the owners of Hapoalim and Mizrahi bought their banks on credit.
In other words, increasing the reserves for doubtful debt creates the cushion for a rainy day. It results in lowered expenses, shrinking loan portfolios and dividends so that more stays in the coffers for an emergency. And it's important to remember that the top priority of the supervisor of banks is to prevent the banks from going bankrupt, because he'll lose his job and professional stature.
But the banks will now look for ways to compensate themselves and grow back their profits. They can't increase the interest rates paid by their large corporate customers, because they maintain accounts in several banks and move banks in the search for cheap financing. Competition prevents these banks from raising the interest rates for them.
So where will they raise them? Where it's easy and simple: household accounts, which means all of us, who don't check and don't even know how much interest they're paying on overdrafts. We don't check and we don't argue. That's why our interest rates will go up.
And there's another area where the banks will gorge: fees. They haven't started talking about it yet, but they'll put a lot of emphasis on increasing banking activity that involves fees, like buying mutual funds. Increasing fees is a good and practiced way to increase profits and as in the case of the interest rates, the people who will foot the bill are the eternal suckers who don't check to see how much they pay in bank fees - us, the household account holders.
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