I Wouldn't Bank on It

During his entire term as Bank of Israel governor, Jacob Frenkel believed that there should be comprehensive reforms in the banking system, in order to solve these two basic problems. Can he now change his skin and represent the banks?

Imagine that the Dubek cigarette company were to turn to a recently retired head of oncology - one known for his stubborn battle against smoking - and ask him to head a public relations campaign to encourage smoking. Would the public believe him?

Well, Dubek hasn't done that, but the directors of the banks have recently turned to the former governor of the Bank of Israel, Prof. Jacob Frenkel, requesting that he head the Israel Banks Association, in order to prevent some of the edicts that are threatening the owners and directors of the banks.

The owners and directors aren't happy these days. Although they earn huge salaries, they feel persecuted, hated and despised. Everyone is striking out at them - journalists, MKs, the supervisor of banks, the governor of the Bank of Israel and the finance minister, who called them "a money pump" and plans to privatize Bank Discount (with the help of a private investor) and Bank Leumi (with the system of options).

Every bank has a fine PR department, and they hire the best lobbyists and the most expensive lawyers, but that's not enough for them. They are afraid of the anticipated decision of an investigative committee taking provident funds and mutual funds out of their hands, a decision that means the loss of a great deal of power and money. In addition, about 30 bills have been submitted in the Knesset concerning commissions, interest rates and funds - and all of them threaten the profits of the banks.

Thus, publicist Moshe Teomim "invented" the proposal to appoint Frenkel, who is winding up his work at Merrill Lynch investment house this month, as chair of the Israel Banks Association. In principle, there is no reason why a person who works in the public sector shouldn't move over to the private sector and represent various interests there. But the case of Frenkel is different.

During his eight years as the governor of the Bank of Israel, he convinced us that the two basic problems of banking - low competition and conflicts of interest - are very harmful to the economy. That's why he preached that the control of real assets be taken out of the hands of the banks, that they be forced to give up ownership of mutual funds and provident funds, and that the Union Bank be separated from Bank Leumi, Bank Tefahot from Bank Mizrahi and the Mercantile Bank from Bank Discount.

The low level of competition in the banking industry stems from a banking system that is in fact a duopoly; in other words, two large banks dominate the system, and the small clients and households turn into captives who pay high commissions and insane interest rates. The conflicts of interest stem from the fact that banking deals with too wide a range of fields: granting credit, raising capital, and the capital market, through control of mutual funds, provident funds and consultation services for the general public.

The provident funds, for example, are in effect a bank that receives deposits and gives credit. If the funds were under separate ownership, there would be another player in the market, and the price of capital would drop. But the moment the funds are owned by the banks, they operate out of conflict of interest. If a bank wants to cover the debt of a problematic company, it issues its own bonds (as an underwriter) on the stock market, and its provident funds purchase the bonds. In that way, the company can pay its debt to the bank, while the bad debt is transferred to the members of the provident fund - the general public.

The same is true of consultation services. As long as the banks are holding the mutual funds and the provident funds, they cannot give advice. That is like someone going to a Ford agency to ask for objective advice about buying a car. What does he expect? That they'll recommend a Mazda?

During his entire term as governor, Frenkel believed that there should be comprehensive reforms in the banking system, in order to solve these two basic problems. Can he now change his skin and represent the banks? Can someone who was a governor, who wanted to be finance minister (twice), who served on the executive committee of Merrill Lynch, agree to turn into a PR man who sells merchandise in which he doesn't believe, and which damages Israel's economy? Will money solve everything?