A government committee’s long-delayed recommendations on how to step up competition in consumer lending said Israel’s two largest banks should sell their credit-card businesses.
The proposal was the centerpiece of a series of recommendations, issued Monday, aimed at making consumer credit cheaper and easier to get.
But the committee, chaired by former Antitrust Commissioner Dror Strum, has been riven by disputes that delayed completing the report — an interim document that may be subject to further revision — and that were evident at the news conference called to unveil the measures.
Finance Minister Moshe Kahlon, who had made banking competition a key part of his election platform, told the press conference he didn’t feel obligated to follow all the Strum panel’s proposals. “I accept the conclusions, but I am not obligated to adopt them. If I see a need for change, I will make it,” he said.
Meanwhile, Bank of Israel Governor Karnit Flug warned that the reforms must not jeopardize the financial stability of Israel’s banks, which had weathered the global financial storm that began in 2008. “We must examine things with a long-term view and avoid moves that will cause damage that outweighs their benefit, endangering the market,” she said.
The committee hopes that credit-card issuers and other financial-services companies can become serious competitors to the banks in consumer lending. The banks control 86% of that market, credit card companies just 8% and other financial companies 6%.
Analyst following the banking industry generally lauded the proposals, but said their impact would be gradual.
“The Strum committee recommendations are a step in the right direction for increasing competition in consumer credit. We expect to see an increase in lending but we don’t think there will be a revolution, as there was in other areas where regulators intervened,” said Alon Glazer of Leader Capital Markets, a reference to Kahlon’s shake-up of Israel’s cellphone carriers three years ago.
Under the Strum proposals, Bank Leumi and Bank Hapoalim would spin off their credit-card businesses into stand-alone entities that would be free to compete with the banks in offering consumer loans. The banks would have up to three years to sell their credit-card units, which would likely fetch a combined 2 billion shekels ($520 million).
The proposals would also ease the capital adequacy ratio requirements for the banks, a benchmark aimed at guaranteeing that lenders can weather bad loans.
There was fierce disagreement within the committee over other aspects of the credit-card divestment plan, with the Bank of Israel and the Justice Ministry lined up against the Finance Ministry, the Antitrust Authority and on some matters also economist Avi Ben-Bassat, the public representative on the panel.
The two smaller banks, Israel Discount Bank and First International Bank of Israel, will not be required under the Strum proposal to sell their joint credit-card venture, Visa ICC (CAL).
Critics said that because CAL is the biggest consumer lender of the credit card companies, letting it remain with its bank shareholders would undermine the principle of competition.
As a result, the panel compromised and agreed to let Discount and FIBI keep CAL for another four years and then revisit the issue once the new, competitive market is in place. The decision is an important victory for Discount, which derives a fifth of its profits from CAL.
The other controversy is over whether the two big banks should be allowed to market credit cards issued by independent companies. The Bank of Israel said they should, but for now it looks as if the panel will recommend a four-year ban.
The Strum committee also recommended that the Bank of Israel, which is responsible for regulating banks, also be made responsible for regulating the credit card companies.
But Ben-Bassat and Finance Ministry representatives expressed concern that the central bank is more focused on insuring the financial strength of the banks than on encouraging competition. They argued for spinning off a new, independent body from the treasury’s capital markets, insurance and long-term savings division and making it responsible for the credit-card companies.
To meet concerns about the Bank of Israel’s position, the committee agreed that a government panel would be formed to guarantee competition, and that the central bank would have to listen to its views.
The other reforms the Strum panel proposed include:
* Easing regulations for new companies entering the consumer lending business, such as online lenders.
* Banks will stop clearing credit card payments and the monopoly they now jointly control called Shva would be jointly controlled with the credit card companies
* Institutional investors, such as insurance companies and pension funds, that have been providing business loans will be encouraged to make consumer loans as well and will be authorized to use members’ funds to finance them.
The committee will present a final report to the government after a public hearing.
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