The financial authorities are crafting legislation to create a framework for cooperative banks that mimics neither the European nor the American model.
The process, under the aegis of the banks supervisor, the Finance Ministry and the Registrar of Cooperative Societies, is expected to take several months, with the legislation passing within a year under the most optimistic scenario.
The establishment of cooperative banks to increase competition in banking services for households, small businesses and midsized firms was one recommendation by a team led by banks supervisor David Zaken.
There are two main models for cooperative banks in the world. Under the American model, cooperative banks’ clients belong to a closed circle of members. Co-op banks’ services are usually basic and capital requirements are modest.
In the European model, co-op banks offer a full array of services to anyone who wishes to open an account, even those who are not members or shareholders in the bank.
But unlike their American counterparts, European cooperative banks don’t receive easier regulatory requirements. Both models insist that a cooperative’s members take part in shareholder meetings where each member has one vote.
In any case, after meeting with European and American regulators, the Bank of Israel decided to forgo both paradigms and create a unique model for Israel.
The Bank of Israel was apparently leery about the relatively high failure rate for new cooperative banks in the United States. While in America the public is less exposed to bank failures due to federal deposit insurance that protects their savings, in Israel the government does not insure bank deposits.
And the European model appears problematic for Israel because applying similar regulatory requirements to cooperative banks and standard banks would probably create onerous barriers of entry for cooperative banks.
The Bank of Israel is expected to demand that cooperative banks meet the regulatory requirements that apply to commercial banks. Still, the plan would let cooperative banks that wish to reduce their regulatory burden avoid high-risk activities like derivatives, proprietary trading and the holding of foreign subsidiaries.
In any case, a former senior banking executive says that if cooperative banks don’t receive significantly relaxed regulatory requirements, they will find it hard to compete with established banks due to the high cost of regulatory compliance.
Even smaller for-profit banks like Union Bank and Bank of Jerusalem, he says, are overburdened by government regulation and have a broader customer base than cooperative banks will have in the years immediately following their founding.
Nevertheless, sources familiar with the work of the Bank of Israel’s bank supervisors say the chances the central bank will ease regulatory requirements on cooperative banks are close to nil. They say the Bank of Israel values the stability of the banking system above all else.
Until the legal and regulatory framework for cooperative banks is settled, entrepreneurs will find it hard to develop detailed business plans.
But despite the problem posed by an unclear regulatory environment, the Ofek Group has begun raising money from people interested in becoming members of a cooperative bank.
Ofek recently launched a computerized system to let the public enter its website and buy a share in its cooperative bank for 3,000 shekels by credit card. The company is thought to have recruited several hundred members so far, out of goal of 30,000 members.
Still, Ofek’s efforts are spurring the banks supervisor to push forward legislation on the matter quickly, to avoid impeding the company’s initiative. Thus, as the number of people who purchase shares at Ofek to become members increases, so will pressure on the bank supervisor to create a clear regulatory environment.
Two other initiatives to establish cooperative banks are in the works, but they are waiting for a clearer regulatory environment before recruiting members and funds.