Central Bank: Tycoon Loan Losses No Danger to Banks

A paper defending bankers and regulators finds no basis for accusations of conflicts of interest or special treatment for deadbeat moguls.

Hedva Ber, the Bank of Israel’s banks supervisor.
Ofer Vaknin

The Bank of Israel on Sunday answered back critics who say lenders and regulators were too ready to give tycoons and their holding companies loans and too hesitant in trying to get repaid when the loans went bad.

In a 10-page document, the central bank said the bad debt the banks accumulated lending money to tycoons like Eliezer Fishman, Nochi Dankner, Lev Leviev and the late Motti Zisser were made taking proper business considerations into account.

The fact that many of the loans went sour had little impact on the quality of the Israeli banking system’s loan portfolio, said the report, which was issued by Banks Supervisor Hedva Ber.

“Except for isolated incidents, a [Bank of Israel] review did not find the loans were made out of ulterior motives or due to conflicts of interest, although the tools available to the banks supervisor to find instances like this are limited,” the Bank of Israel said.

“In contrast to what many say, the data do not show that the banks’ relationships with big borrowers were any more forgiving than they have been to household borrowers. In recent years, we have witnessed major efforts by the banks to reach debt agreements and ‘soft loan collections’ vis-a-vis consumer borrowers [in arrears].”

Israel’s banks and the officials who supervise them have come under criticism from the media and politicians for letting tycoons run up huge debts and then fail to repay the banks in full.

The latest of the tycoons has been Fishman, who may be the biggest debtor of them all with an estimated 4 billion shekels ($1.1 billion) in loans he failed to service for a long time before lenders turned to the courts last summer.

On Sunday, Fishman’s attorneys squared off with Yossi Benkel, the lawyer appointed to administer Fishman’s assets. Fishman had claimed Benkel was exceeding his authority in putting restrictions on the Fishman family’s use of properties, while Benkel accused the family of seeking to keep assets out of the hands of their creditors.

While bad debt like Fishman’s has attracted a lot of attention, the Bank of Israel said the problem should be put into perspective. Of the 940 billion shekels in loans outstanding in the banking system, only 2.3% was lent to highly leveraged holding companies, the kind favored by tycoons.

Moreover, the central bank said, only 5% of those loans have been classified as problem loans; that is, loans where there is a real or potential risk the credit won’t be repaid.

“Loan losses from the big borrowing groups were not unusually big from an international perspective and, despite the failures, the quality of bank lending portfolios in Israel is high compared to banks in most of the developed world,” the Bank of Israel said.

“The loan losses had wide-ranging public importance but they didn’t fundamentally endanger the stability of the banking system.”

The bank said the majority of bad loans were made to finance leveraged buyouts of big companies in the years before the 2008 financial crisis. Business lending by banks has since declined from 40.6% of all lending in 2008 to just 24.9% in 2015 as rules tightening lending by banks to big holding groups were imposed.

However, starved of bank credit, the holding groups increased their leveraging by tapping the bond market.

The Bank of Israel said it took adequate steps to deal with the problem over the years, including strengthening rules on granting loans and reducing the banks’ exposure to major borrowers.