MKs Ignore Central Bank to Make Changes in Banking Reforms

Bill now goes to full Knesset for second and third readings before becoming law

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The Bank of Israel headquarters in Jerusalem.
The Bank of Israel headquarters in Jerusalem.Credit: Reuters

Ignoring objections by the Bank of Israel, the Knesset Reform Committee on Wednesday introduced a series of changes to banking reform legislation before advancing the bill, which will now be presented for second and third readings in the Knesset before becoming law.

The Law for Increasing Competition in the Banking System aims to increase competition for consumer credit mainly by forcing Israel’s two biggest banks to spin off their credit card businesses.

While Bank of Israel Governor Karnit Flug had given mild support for the proposed law, on Wednesday she objected to the changes lawmakers inserted into it over the course of deliberations.

“There have been several changes not all of which were examined in depth and some of them will almost certainly cause more damage than benefit,” she told the Knesset committee.

“Several days ago we discussed the matter and we reached an agreement – the finance minister, Committee Chairman [Eli] Cohen, I and others – about a framework we believed was responsible and proper. That framework was completely destroyed in the bill you are now voting on,” Flug saidl.

Among the changes inserted into the legislation was a requirement that banks sell computer-service infrastructure to the new banks the law aims to encourage with easier capital and other requirements. That amendment was introduced by Yesh Atid MK Haim Yelin.

Another will enable non-bank financial-service companies to have access to technology that enables them to gather information from banks about fees and interest rates in order to offer clients alternative services at other banks.

MK Erel Margalit (Zionist Union) made two proposals that won committee approval – one that would encourage formation of a credit card clearing consortium that would reduce clearing fees for small businesses.

Yelin also introduced an amendment that would make bankers liable for criminal penalties, including jail, for violations, including giving out information about a client’s bank balance or charges run up on a debit card.

Popularly known as the Strom Law for Dror Strom, the former antitrust commissioner who chaired the government committee that made the original recommendations, the legislation, if approved, will require Bank Hapoalim to divest its Isracard unit and Bank Leumi its LeumiCard unit within three to four years.

The law’s backers hope the independent credit card companies will then go on to offer consumer lending in competition with the banks.

CAL, Israel’s third biggest credit card company, will also have to be divested, but only in four or more years because it is controlled by two smaller banks – Israel Discount and First International Bank of Israel.

MKs said they would also look into the status of two smaller credit card issues — American Express and Diners Club. Although they are exempt from monopoly restrictions imposed on the bigger issuers, they are subsidiaries of Isracard and CAL, respectively, and charge high fees. MKs urged the Bank of Israel to order them to separate their sales and marketing from their parent companies.

Finance Minister Moshe Kahlon, who has been a key backer of the banking reform in the hopes of repeating his success from 2012 in lowering cellphone rates, praised the legislation.

“After decades during which the banking industry became more and more concentrated and the number of banks declined, we’re now changing the direction,” he said. “The reforms we passed today are nothing less than historic for the citizens of Israel.”

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