Israel moved closer to a new era of enhanced banking competition after a government banking-reform committee ended a months-long stalemate and submitted final recommendations over the weekend.
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At a cabinet meeting Monday, Finance Minister Moshe Kahlon presented the final plan and vowed that Israeli households and small businesses would soon be benefiting from increased competition in consumer credit.
“After 47 years in which no new bank was started in Israel, we have paved the way to establish new banks in the country,” said Kahlon, who pledged in last year’s election campaign to usher in the kind of competition he generated as communications minister for the cellphone industry.
The Strum committee’s chief recommendation, which had been known for some time, calls for Israel’s two biggest banks – Hapoalim and Leumi – to divest their credit card-issuing subsidiaries in expectation that the standalone credit card companies will quickly turn themselves into banks.
To encourage this, the credit card companies – Hapoalim’s Isracard and Leumi’s Leumi Card – will enjoy less rigorous capital requirements than what would normally be the case to qualify for a banking license. In addition, the reforms call for easier terms for anyone wishing to set up an entirely new bank.
Cal, the third big credit card issuer, will remain in the hands of Israel Discount Bank and First International Bank of Israel for now, but the issue of ownership will be reexamined after four years, the Strum recommendations say.
The Strum reforms had been held up by a dispute between Kahlon’s Finance Ministry and the Bank of Israel over how much to loosen the requirements for banking licenses for new lenders. The central bank was concerned that easing the limits too much could threaten the stability of the banking sector.
Over the weekend, however, Bank of Israel Governor Karnit Flug backed down on some of the central bank’s demands. Instead of minimum first-tier capital of 400 million shekels ($104 million), new banks will only need to raise 50 million shekels.
In addition, their capital adequacy ratio – a measure of a bank’s financial strength – will be much less rigorous in a new bank’s first years than for veteran banks. The lower ratio, which could be as little as 4%, half of what was originally planned, should enable new banks to grow and build a client base, the committee said.
The central bank also won some concessions, most notably retaining supervision over the credit card companies after they are spun off. In addition, the Strum committee’s original plan to bar the banks from marketing credit cards was replaced by one that gives the credit card companies right of first refusal to offer clients a card. But it gives banks a 45-day window before a holder’s card expires to make a counteroffer.
At Monday’s cabinet meeting, Flug threw her support behind the final recommendations but, in contrast to Kahlon’s celebration of competition and greater access to lending for consumers and small businesses, she stressed the necessity of careful supervision.
“The agreement whereby supervision of the credit card companies will remain with the Bank of Israel is critically important in order to present a situation in which there is a difference in the regulatory requirements for granting credit between the banks and the credit card companies . Such a difference could create pressure to lower standards for making loans all across the financial system,” Flug said.
Kahlon, meanwhile, expressed optimism about the process of credit card issuers, which now account for less than 10% of all household lending, emerging as real competition to the banks.
“Even today there are a lot of groups that want to buy Isracard and Leumi Card,” he told a meeting of his Kulanu party. “Whoever buys them will get a banking license within three months, something that was never possible until now.”
In addition to the credit card issuers, the Strum recommendations will make it easier for institutional investors to make consumer loans from pension-fund and provident-fund money.
Also, credit unions will face easier standards on capital and supervision. Unions with fewer than 15,000 members or a minimum number of deposits will not have to provide any capital under the revised recommendations.
With reporting by Meirav Arlosoroff and Michael Rochvarger