When she turned one, Adi Goldenzweig’s father opened a college savings account for her. But when the time came, Goldenzweig didn’t need the money. It remained in the Kikar Hamedina branch of Bank Hapoalim in Tel Aviv and was eventually classified as a dormant account.
At the end of January 2018, when Goldenzweig was already working as a computational biologist at the Weizmann Institute of Science, she checked the account’s balance: 60,000 shekels ($18,000 at current exchange rates).
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When Hapoalim subsequently closed the Kikar Hamedina branch and transferred the 60,000 shekels to another branch, the bank invested the balance in bonds.
Hapoalim was following a Bank of Israel directive dating from the early 2000s requiring commercial banks to invest the balance of dormant accounts containing at least 5,000 shekels in government bonds that are linked to the inflation rate. These are short-term bonds of two to five years. The central bank assumed that putting the money into the bonds would preserve its value even while the bank serving the account collected its usual fees.
There are around 539,000 dormant accounts in Israeli banks, with combined assets of 6.8 billion shekels. Of those, 90,000 accounts with a combined value of 1.7 billion shekels belong to people who have died. That money is invested in money-losing bonds.
The banks earn money on the fees they charge and the state collects taxes. In the meantime, industry sources estimate the accounts are losing between 100 million and 300 million shekels a year on money-losing investments mandated by law.
In Goldenzweig’s case, Hapoalim invested in April 2018 the 59,000 shekels in her father’s account in government Galil 5903 bonds due in July 2021. When the bonds were purchased, they were traided at about the same price as their redemption price, so there was no chance of then losing value so long as they were held to maturity.
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However, when checking the account she discovered that rather than earning a modest profit, the account had lost 5.8 percent. There was just 55,600 shekels in it even after taking into account the interest income it accrued.
Whatever the Bank of Israel thought at the time the policy was devised, index-linked bonds of two-to-five years are among the riskiest investments there are. Their price is highly correlated with the inflation rate, so that when the rate varies, even slightly, from market forecasts, the price moves sharply.
In addition, the yield curve for short-term bonds has been negative for several years. That means that the money from dormant accounts is being invested in bonds that have negative yields of 1% to 1.6 percent. Anyone buying the bonds and holding them to term will end up with a loss.
In Goldenzweig’s case, she is required to pay tax on the interest income from the bonds. Thus, she earned interest income of 6,100 shekels on the bonds, of which 1,500 went for taxes. Bank fees cost another 1,400 shekels The checking account ran up an overdraft of 500 shekels.
Hapoalim said in response that no one could predict the rate of inflation from the time the bonds were bought, which was 0.7 percent while the price of the bonds fell 1.5 percent. It says Goldenzweig had been approached about the matter and she told the bank not to do otherwise. In any case, the bank noted that she would be able to offset her losses on the bonds against any tax she paid.
Goldenzweig said Hapoalim never contacted with her until October of this year.
“If these is really the bonds that they bought for her, it is one of the most outrageous purchases they could have made,” said an investment manager, who spoke to TheMarker on the condition of anonymity.
“On the date they bought them, the yield on the bonds was minus-1 percent. That means that when they bought them, the bank knew that the holder would lose money on them,” the manager said.
As a rule, he continued, investors buying short-term, inflation-indexed bonds are betting that the consumer price index will rise. “That hasn’t looked like a smart bet in recent years and probably won’t be in the next few years,” the manager said. “During the period we’re talking about, inflation rose a little, to about 0.5 percent, but inflation expectations were higher.”
Banking sources who spoke to TheMarker acknowledged the problem, but they can’t violate the law. “At least they (the account holders) can enjoy the tax benefits from losses accrued by the bonds,” said one.
The bank managing the dormant account is responsible for finding the account holders, if any, and advising him or her what to do. Until now, all the bank was required to do was to send letter to the holder’s address and try to make telephone contact. But, under a draft rule issued in August, banks now have to make a greater effort to find the account holders and appoint a manager to take charge of the issue.
But that still leaves the issue of how to invest the money held in dormant accounts. The Bank of Israel is aware of the problem but hasn’t come up with a solution.
“The supervisor of banks is now working on updating the investment rules on inactive deposits and adjusting them to market conditions,” the spokesman said.