Israel's Treasury Weighing Plan to Subsidize IT Costs for New Banks

Proposal aims to reduce major cost item in hope it will spur formation of new lenders.

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Finance Minister Moshe Kahlon at the annual conference of the Antitrust Authority, Airport City, January 26, 2016.
Finance Minister Moshe Kahlon at the annual conference of the Antitrust Authority, Airport City, January 26, 2016.Credit: Ofer Vaknin

Finance Minister Moshe Kahlon is expected to unveil plans shortly for government subsidization of information technology services for the new banks expected to be established in the wake of the Strum committee recommendations on bank competition, TheMarker has learned.

The initiative is further indication of Kahlon’s determination to create more competition in Israel’s highly concentrated banking sector, as a means of lowering costs to consumers and small businesses and easing access to loans.

The Strum committee, whose proposals were approved earlier this month, includes a package of reforms to create competition, including forcing Israel’s two big banks to spin off their credit card units in the hopes they will turn themselves into banks and ease regulatory standards for groups forming new banks.

But the Kahlon proposal would be unprecedented in that it would involve using the state budget to help new lenders get off the ground.

Specifically, sources said treasury officials are talking about spending 150 million shekels ($38.9 million) to buy information technology services the banks would need from Tata Consultancy Services, the IT services and consulting arm of India’s giant Tata Group.

The only requirement is that qualifying banks would have to commit to achieving a minimum market share in a designated timeframe, sources said.

The Strum committee has already made it easier for new banks to be established, including reducing the requirements for first-tier capital to just 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.

However, Kahlon – who is determined to repeat his success in breaking up the cellular cartel four years ago in the banking sector – wants a bigger safety net for the new lenders.

Treasury officials reportedly considered offering new banks government guarantees, but officials were concerned at the moral hazard of lenders’ knowing they are risking state funds rather than their own. That is when officials hit on the idea of IT subsidies.

A study conducted for the Strum committee found that IT costs are the second-largest item for banks, exceeded only by personnel costs. In 2012, for instance, Israel’s five biggest banks spent a combined 5.2 billion shekels on their IT operations.

Israel Discount Bank, the country’s third-largest lender, spent 1 billion shekels developing its new information systems and even tiny Bank Yahav is budgeting 450 million shekels over the next decade to Tata to operate its system.

The three experts appointed by the committee to study the matter – including Udi Chen, who was responsible for the rollout of the Discount IT system – estimated that a new Israeli bank would have to spend 150 million shekels to build an IT system and another 30 million annually to operate it, costs steep enough to deter groups interested in starting a bank.

Tata is an obvious candidate to provide the services because its contract with Yahav means it has adapted systems to Israeli requirements. It has an Israeli subsidiary and has invested in the Momentum Fund run by Tel Aviv University’s Ramot technology-transfer arm.

In related news, the Bank of Israel on Tuesday issued a directive instructing banks what information they will be required to submit to a centralized credit database.

The database, one of several measures the Bank of Israel and treasury are taking, is designed to make it easier for consumers to get loans by creating a centralized credit history based on a borrower’s record for repaying debts and current bills. From that, a banker can assign a credit rating and a rate of interest based on the risk.

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