Israel’s ‘Captive’ Regulators Fail to Properly Supervise Banks, Knesset Committee Says

The Bank of Israel's Banks Supervisor takes the most blame for generous credit terms to tycoons

Amir Yaron, governor of the Bank of Israel, releases the bank's 2018 report in Jerusalem, March 31, 2019.
Emil Salman

Israel’s financial regulators failed to prevent the country’s banks from making unwise loans to major borrowers including a number of high-profile tycoons, a special parliamentary committee said in its final report published Tuesday.

The report says the banks took a systematic approach under which tycoons received generous credit terms and the public paid the price by subsidizing the debt and suffering a loss when the loans weren’t repaid.

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“There is no choice but to determine that the regulators, particularly those charged with bank oversight, were found to be captive to the entities they were supposed to regulate,” the report said.

“The shortcomings we found showed that the regulators did not supervise, did not check, did not investigate, did not use their authority to impose sanctions and did not report to the public as they should have.”

The committee, sometimes known as the tycoon committee or the Fishman committee, was headed by Eitan Cabel, a longtime Labor legislator who did not make it into the Knesset that will be sworn in on April 30.

The report is filled with harsh criticism of the regulators’ past performance, and in some cases relates to events still underway. The report addresses the efforts of the Israel Securities Authority, the Finance Ministry’s Capital Markets, Insurance and Savings Authority, and the Israel Antitrust Authority. The main criticism, however, is directed at the Bank of Israel’s Banks Supervisor.

The Bank of Israel, in turn, criticized the report, saying mistaken conclusions had produced dangerous recommendations.

The report called the Banks Supervisor “a captive regulator that does not work to deter those under its oversight and thus harms the public interest,” leading to a "lack of sanctions and a lack of deterrence against severe negligence in issuing credit due to the knowledge that the regulators will not impose severe penalties.”

The committee was set up in July 2017 to investigate the bank loans to a list of highly leveraged tycoons who have led some of Israel’s largest conglomerates over the past 15 years. They include Eliezer Fishman, Nochi Dankner, Yitzhak Tshuva, Moti Zisser, Lev Leviev and Shaul Elovitch.

These loans raised questions because of Israel’s highly concentrated economy, and because many of the borrowers later subjected their lenders — both banks and bondholders — to steep losses. A 2013 report by the state comptroller found that some 21.1 billion shekels ($5.9 billion) in bonds had been subject to debt settlements between 2008 and 2011 alone.

The Knesset committee did not focus on the management of tycoons’ companies but rather on the banks that lent them money, the institutional investors that bought their bonds, and the regulators responsible for supervising the banks and institutional investors.

The report calls on the Bank of Israel to ensure that Israel’s commercial banks do not give preferable credit terms to big borrowers at the expense of small borrowers.

It says the Israel Securities Authority does not sufficiently supervise big borrowers and does not properly communicate with the Bank of Israel’s Banks Supervisor.

It says Israel’s regulators should be subjected to stricter Knesset oversight, and notes a problem that afflicts many countries: a “revolving door” of employees at regulatory authorities who move on to financial institutions. This contributes to the “captive regulator” phenomenon under which regulators favor the interests of private financial institutions over the public.

For its part, the Bank of Israel said the report ignores significant efforts and reforms and draws faulty conclusions that form the basis of “risky recommendations without interpreting their implications.” It said the report covers a period when banks around the world failed, while Israel’s banking sector remained stable and secure.

Israel’s banks union also harshly criticized the report, saying it ignores basic facts about a banking sector that is strong and managed responsibly.