Fischer's Fear of the Unknown

Barring anyone from controlling both a financial and non-financial business isn't as risky as the Bank of Israel governor thinks.

His approaching departure loosened Bank of Israel Governor Stanley Fischer’s tongue at his farewell appearance in front of the Knesset’s Finance Committee this week. Fischer surprised everyone by addressing the Israeli-Palestinian conflict for the very first time in his eight-year term in office.

Another surprise was his unequivocal stance in the debate now raging over the section of the business concentration law dealing with separating ownership of financial and non-financial businesses.

Fischer supported the business sector’s position opposing proposals raised by Knesset lawmakers for toughening the criteria separating ownership to the point of completely severing the connection, i.e. anyone holding a controlling interest in a bank or insurance company won’t be allowed to own any other business.

“If we insist on completely separating financial and non-financial holdings, there won’t be anyone who could have a controlling share in the banks because they wouldn’t be able to attain the required capital by means of their activities in non-financial sectors,” according to Fischer. “It is likely that in several years we’ll reach the conclusion that there’s no need for controlling ownership for banks, but in the meantime I suggest not engaging in such large experiments in the financial system.”

Fischer’s idea

This position by Fischer took many aback since Fischer is the progenitor of the idea in Israel that there is really no need for a nucleus of control at the banks. Fischer is the one who revolutionized the Bank of Israel’s traditional stance of insisting that the bank have a shareholder group in charge. He changed his attitude following the Danny Dankner-Shari Arison crisis.

That bizarre episode convinced the Bank of Israel that sometimes the damage caused by controlling shareholders can outweigh their benefits. It subsequently stood behind the law dealing with banks without a controlling core of ownership: the amendment to the Marani Amendment to the Banking Law. It also pushed for the immediate implementation of the law on Bank Leumi, the first publicly traded bank without a controlling shareholder, using mechanisms set out by the law for determining the process of choosing its board of directors.

Thus it, it isn’t clear what worry Fischer was suddenly struck with over the possibility that other banks will join Leumi as banks without a such a nucleus. In fact, it isn’t at all clear if this is likely to occur.

The possibility of erecting up the financial/non-financial wall doesn’t necessary means that the banks will end up being the ones put up for sale. The stricter standard only means that controlling shareholders will have to choose between their non-financial holdings and their bank holdings. Let’s venture a guess that if Arison is required to choose between her control of Bank Hapoalim and control of Housing & Construction Ltd., it won’t necessarily be the bank she’ll be putting up for sale.

In any case, even if raising a wall between non-financial/financial businesses results in the sale of banks, and that no buyers can be found, and the banks become banks without a controlling shareholder, we still need to ask ourselves if this new situation is necessarily bad. In other words, are banks without a controlling shareholder any worse or less stable than banks having one?

Stanley Fischer’s answer is: I don’t know, and since I don’t know I prefer not to conduct any risky experiments. Fischer’s position can’t be belittled, but it’s mainly an extremely conservative stance, a stance that says: Although I’m not pleased with the current situation, I have no idea if the new situation will be better or worse so I prefer staying with what I have.

But we know the existing situation is very problematic. First of all, some of the controlling cores have turned out to be controversial and unable to make appropriate management decisions, and nearly all have turned out to be unable to reach into their own pockets and inject more personal equity into the banks under their ownership.

The worst pyramids

Second, the current situation isn’t equitable since individuals with a small stake of up to 20% of the banks’ capital control the banks’ entire boards. It’s already been said that in this regard the banks are Israel’s worst business pyramids: With very little equity it’s possible to control a huge amount of capital, nearly half the economy if you wish.

Third, the fear of conflicts of interest created by joint control of financial and non-financial holdings in an economy as small and concentrated as Israel’s is very tangible. David Weissman, who has interests in energy ‏(Dor Alon‏) and food retailing ‏(Mega‏), was heard to say that this could be taken as a complaint of being discriminated against by many of Israel’s suppliers of credit due to competitive concerns. First International Bank of Israel has ownership ties to Paz Oil, Leumi has a substantial share in Paz, Phoenix is connected to Delek Israel and Clal Insurance is tied to Super-Sol.

In light of these problems, making do with the existing situation − only because the new situation is still unknown − seems like an inadequate response. It’s not every day that the Knesset legislates such a sweeping structural law, and there’s no reason for the fear of something new to prevent any change to the situation at hand. For that matter, throughout the world banks manage without a controlling shareholder and rather successfully. And a law dealing with managing banks without a controlling core has already been legislated − a law meant to address the problems that have come up in the model used around the world.

Former Bank of Israel Governor Stanley Fischer, now vice chairman of U.S. Federal Reserve.Credit: Daniel Bar-On

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