On Independence Day 2011, some weeks after two groups won a Communications Ministry tender to compete in Israel’s mobile communications industry, this happened: Moshe Kahlon, the communications minister at the time, met with an adviser who warned that it was too soon to hail the arrival of competition in mobile communications.
Two companies had won tenders to compete in Israel’s cellular industry, but the banks wouldn’t lend them a shekel, explained the adviser. Worse, nobody in the Israeli business scene would go near them because the “finance clique” didn’t want competition in mobile communications.
Kahlon was surprised: Don’t banks seek new business opportunities? Don’t they want to lend?
They do, explained the adviser, in an open, competitive market. But the concentrated Israeli market has its own rules. The banks and insurance companies had lent billions and billions to the cellular companies and the pyramids owning them. If competition raised its head, there’s no telling what would happen: The last thing the banks want is new players who might compete with the existing ones that owe the banks so much.
Thus the banks protected its customers, the mobile operators, and were not prepared to lend money to potential competitors.
Aha. Kahlon got it. Business people only want a free, competitive market when they’re the ones founding new companies and penetrating new markets. The moment they succeed and grab a decent market share, they don’t want competition any more. Au contraire, they want to stifle it, and shackle any politicians thinking of change.
The solution, the adviser told Kahlon, was to involve the Bank of Israel.
Enter the Bank of Israel
Two years earlier, the Bank of Israel itself had felt the fury of the financial clique, when it urged Bank Hapoalim to dump its corrupt chairman, Danny Dankner. The central bank saw how the cream of the business world and press stood behind Dankner, a corrupt banker, and his cousin Nochi Dankner, who at the time controlled the IDB group, which controlled vast swathes of the Israeli economy.
Ultimately the social protest that exploded in 2011 forced the government to admit that the Israeli economy had become concentrated. Kahlon did manage to wedge competition into the mobile industry. Prices of mobile communications packages fell by as much as 90%. The pyramids owned by the tycoons started to teeter and collapse. Regulators who hadn’t even looked at the monopolies for years started to take action. The cost of living in Israel became a hot-button topic.
Reforms in private healthcare, food, energy, the capital market and more had seemed impossible all these years. Suddenly things started to move, or at least to enter the public debate.
Meanwhile, Kahlon had split off from Likud and formed a new party, Kulanu (“all of us”), and won 280,000 votes, enough to propel him into the finance minister’s seat in Netanyahu’s new government. He would be the first finance minister to dare even mention the possibility of dismantling the banking monsters.
Also meanwhile, legal steps began against the corrupt politicians, bankers and tycoons. In December 2013, Danny Dankner was sent to prison and his cousin Nochi was ousted from IDB. Half a year later, Ehud Olmert, darling of the tycoons, was also convicted of corruption.
What began as a struggle against economic concentration became reform of the cellular industry and is now looking, suddenly, like an unprecedented opportunity for restructuring Israel’s banking system. Then it will be the turn of the insurance industry.
No, reform of the banks isn’t a natural sequel to reform of cellular communications.
Banks worldwide have become behemoths that dine on regulators and eat politicians for dessert. Their power is especially evident in the United States, where when the great financial crisis of 2008, the worst in 70 years, did not lead the regulators and politicians to break their shackles of captivity and crack down. The banks continue to rule the people through the people’s own money and call the shots in Washington.
Here lies the opportunity: Israel could become the first developed nation that really wipes out economic concentration and eradicates crony capitalism, which starts in the business pyramids, passes through the press and gallops straight to banking and long-term savings.
The cellular reform saved Israelis some 5 billion shekels a year (about $1.25 billion). Banking reform could save them five time as much. Not to mention that the concentrated financial structure weakens democracy and distorts credit allocation, with most of the money going to a handful of giant companies instead of thousands of small companies.
Why reforming the banks can be done
Towering over the Israeli banking scene is the duopoly of Hapoalim and Leumi. The battle to dismantle their empires and rebuild the long-term savings market will easier in that the tycoons won’t be able to claim, as they did in the case of the cellular reform, that economic concentration does not exist. Also, the prime minister will have to give Kahlon the backing he’ll need, after admitting to TheMarker a year ago that economic concentration in the banking system does exist and is dangerous.
He even described the worst part of it, cronyist banking, in which the managers of the banks approved loans for their friends. The real-estate magnate Eliezer Fishman could never have rolled over more than 4 billion shekels in loans to his private companies if he hadn’t owned the business newspaper Globes and a stake in another newspaper, Yedioth Ahronoth. The banks have written off billions in loans given to Fishman, Nochi Dankner and their ilk over the years, which rather says it all about the Israeli banking system.
Another reason reforming the banks is more doable now is that the fear of the “economic concentration club” has abated. Five years ago regulators preferred to serve the status quo and the tycoons for fear of later retribution/hope of getting a cushy job that would earn them millions of shekels a year. Now a new generation of regulators has arisen that wants to do the right thing.
At the Finance Ministry, Kahlon will meet Dorit Salinger, commissioner of the capital market and insurance sector. She’s just waiting for political backing to storm the insurance companies and dismantle the system that lets a handful of people and their kids control hundreds of billions of shekels that belongs to the public.
Kahlon will also meet Amir Levy, head of the budget department, who has used the two months since Yair Lapid vanished to caution the banks to prepare for change.
Why it will be difficult too
But reforming the banks will be much harder than enacting an anti-economic concentration law or reforming the cellular market, because the banks have two unique barriers to throw up against the Kahlon team. One is the Bank of Israel. Over the decades, it has evinced indifference to concentration in the banking system. It even nurtured it here and there. Then there is a whole caste of mid-level management, some 10,000 people, whose salaries start at 40,000 shekels a month, and the unions.
Hapoalim and Leumi control 800 billion shekels of the public’s money. They own giant credit card companies, mortgage banks and all the major distribution channels in the capital market. Bringing change will take creativity, patience, and mainly, a lot of coordination between regulators.
The bankers could manipulate battles over ego and territory to delay, delay, delay. You never know, maybe meanwhile the government will fall. Anything could happen. Kahlon will have to withstand the temptation to settle for a fake mini-reform coordinated with the banks, so he can claim an “achievement” for the public that actually helps not at all in creating competition and lowering costs.
The banks also have enormous budgets to hire experts who will learnedly explain, in exchange for a pretty penny, just how the Israeli banking system is competitive, efficient, lean, fair and munificent. And that it should be left alone lest it collapse and take down the entire economy.
Bringing down the house
Kahlon however not only promised to take down Hapoalim and Leumi, but to lower housing prices as well. So the banks face a double threat: competition that could impair their profitability, and a dive in property prices that could cause them billions in losses.
No serious effort has been made around the world to reform the banking system, which has become “too big to fail,” not to mention too strong to be sued, or investigated properly for criminal conduct.
Israel blazed a trail for the world to follow in anti-concentration legislation two years ago. Let it now blaze a trail to reforming the financial system.
Why Kahlon is the man
Kahlon has a huge advantage over his predecessor at the Finance Ministry: He isn’t arrogant. He listens to economists and understands that what the public wants is results. It wants to pay lower fees at the banks and wants cheaper housing.
If Kahlon wants Bibi’s backing, he should state clearly that he has no intention or desire to be prime minister. That he has come to serve the public.
In the last two months, Kahlon’s campaign to bring down the banking duopoly of Hapoalim and Leumi forced other parties, the Zionist Union and Lapid’s Yesh Atid party, to also declare they’d promote competition at the banks. So, their job in opposition, assuming that’s where they’ll go, will be to push Kahlon to adopt aggressive reforms, more than he’s presently suggesting. Certainly when it comes to the dismantling the banking monopolies and reducing the cost of housing, for the first time in history, there’s a political consensus.
Dismantling the duopoly would strengthen efforts to tackle crony capitalism. It would strengthen the business sector and help reform other sectors – from gas to food, from cars to healthcare.
Regarding gas, Kahlon will have to show even more grit. Throughout his election campaign, he was dogged by rumors of his close relations with gas barons Yitzhak Tshuva and Kobi Maimon. Now he’ll be watched closely, and if he stumbles or stutters, the banks and insurance companies and everyone else will realize that he is vulnerable to pressure, after all.
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