Final Version of Strum Bank Reforms Released on Heels of IMF Critique

The final version of the Strum committee’s recommendations on banking reform, with two major changes added after the draft that was issued in February, was released late on Wednesday.

• Why the Bank of Israel won’t let banks face competition
• Strum curbs banks' long arm in monopolies
• CEO of Israel's largest bank, Hapoalim, announces resignation

The final version of the proposals, which aim to introduce more competition into consumer lending — chiefly by forcing Israel’s two biggest banks to spin off their credit-card issuing companies — came hours after the International Monetary Fund warned that some of the recommendations would actually increase the cost of consumer loans and could destabilize the country’s banks.

The final version addressed one of the IMF’s concerns by leaving control of the third bank-owned credit card company, Visa ICC (CAL), in the hands of Israel Discount Bank and First International Bank of Israel for now. But the issue will be reexamined in four years’ time in light of the new competitive landscape the committee hopes will emerge.

In the meantime, the committee hopes they will use the easier terms being granted to them to turn themselves into full-fledged banks.

The revised proposal will allow the two biggest banks, Bank Hapoalim and Bank Leumi, to continue to issue credit cards, but only four years after they have divested their credit card units, Isracard and LeumiCard, respectively. They will also face other restrictions on their credit-card businesses, in order to allow the divested card companies to better compete.

Finance Minister Moshe Kahlon has pushed to inject more competition into banking, hoping to repeat his success in bringing down the cost of cellphone use by forcing the sector to admit new operators.

But he has run up against the concerns of the Bank of Israel that the new, more competitive industry could undermine the financial strength of the banking industry. The central bank fought to keep the spun-off credit-card issuers under its regulatory control in the hopes of minimizing the risk.

The final Strum proposals, which appear in the form of draft legislation, contain a host of measures aims to protect credit-card companies from excessive competition from the banks.

For instance, the banks – as well as other big financial institutions, like insurance companies — will be subject to rules on terms they can use to lure clients away from the credit-card companies, such as the maximum credit line.