For years, the Bank of Israel stood firm that anyone who wanted to start up a new bank would have to meet the same onerous regulatory and capital requirements as the older, established institutions.
On Sunday, the central bank threw all that aside when it unveiled its new, easier rules for new banks. They include lowering one of the biggest obstacles that perspective bankers have faced, namely coming up with up to 400 million shekels ($112 million) in capital before they could open their doors. Under the new rules, a new bank only has to raise 50 million shekels, at least initially.
But does that mean Israel is going to see its first new banks in decades?
On the face of it, the new rules make it a lot easier for banker-entrepreneurs, but capital requirements are only one obstacle. To create a new bank and a thriving one over the long term, you need to invest a lot more capital than the Bank of Israel’s minimum, and you need a friendly market environment.
At least five factors work in favor of new banks, but just as critically, five work against them.
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The Israeli banking system is a high-cost operation. Everything from personnel costs and maintaining branches to technology and regulations are hugely expensive, even by international standards.
The veteran banks have sought to address this problem by cutting their payrolls, but they have been doing it relatively slowly and severance costs are heavy. They are closing branches, but that process is also proceeding slowly amid opposition from unions.
A new bank won’t have to contend with these problems or with collective labor agreements that tie management’s hands. They can start out as lean operations that will give them an important cost advantage.
The veteran banks are also saddled with overseas operations that have taken away resources and management's attention, and in the worst of cases, the overseas operations have left them paying huge penalties for violations. On this front, too, the banks have been cutting back, even though two of them still face a settlement with U.S. authorities.
But the fact remains that, with or without their foreign operations, the big banks are complicated businesses that deal with an array of clients from big businesses to households to private banking for the wealthy. A new bank that focuses on taking deposits and making loans, on the other hand, can avoid all of those complications and concentrate its resources on the household segment, which happens to be the most profitable.
The older, bigger banks are public institutions that in recent years have suffered from a hostile attitude on the part of the public. They were never beloved but the hostility has grown, especially with regard to the loans they made (and often lost) to the big tycoons. They have also come under fire for high fees and interest rates on loans.
A new bank will come into the market with a clean slate and will have the support of the Bank of Israel, which is determined to inject competition into the industry and wants the new banks to succeed.
The new banks will also have the advantage of operating in a nation of early adopters. Israelis are quick to try out new products and services, so a new all-digital institution will find ready and willing clients. And not only ready and willing, but in many cases the best clients in terms of financial assets.
Meanwhile, Bank Hapoalim and Bank Leumi — the two biggest banks in Israel — are spinning off their giant credit card operations. That will lose them a near-monopoly on consumer lending because up to now, they had exclusively access to the best credit data on households. That will give new banks an opening to the segment that hadn’t existed before.
But there are also factors that work against the new banks.
Many people like to dismiss Israeli banks as dinosaurs, but whatever problems they do have, they also have long-standing and often deep relationships with millions of Israeli clients. The web of connections makes it hard to win away clients and raises the bar to new competition to offer a distinctly better or cheaper alternative.
Meanwhile, the veteran banks have been forced over the years to divest businesses and not only their overseas operations. They have been ordered by the government to sell of non-bank businesses, their fund-management units and soon, the credit card companies. In the end, they will be more focused on their core banking activities.
The veteran banks have huge amounts of equity, which gives them the financial wherewithal to take on new competition. When First International Bank of Israel tried to take on the bigger banks with its low-cost Alpha Card credit card, the big banks matched its terms and Alpha Card was sunk.
And, while the banks supervisor, Hedva Ber, is friendlier than in the past to banking competition, her main goal remains to ensure the stability of the banking industry. If she sees a price war emerging because of overly intense competition, she will act to stop it. That undercuts the ability of a new lender to compete.
In all events, forming a new bank is expensive — more so than the new, lower capital requirements signal. You have to hire staff, buy computer hardware and lure away experienced managers from other banks and pay for expensive marketing and advertising.
It’s a complicated and long-term investment amounting to hundreds of millions of shekels and requires patience.