Israeli Cabinet Gives Backing to Bank Reforms

The cabinet on Sunday unanimously approved legislation forcing the two biggest banks to divest their credit-card companies as the centerpiece of reforms aimed at making borrowing easier for consumers.

• Likud's Elkin Named Environment Minister in Cabinet Reshuffle
• The Suppressors of Growth
• Consensus: Home Front Not Ready for War

But as ministers approved the bill, which will go to the Knesset this week for the first of three readings required for it to become law, Bank of Israel Governor Karnit Flug signaled concerns about its affect on the banks’ financial stability.

“More banks and more small banks and more financial intermediaries that are not banks mean a higher risk of collapse,” she said in remarks to the cabinet, saying regulators would have to shepherd the process carefully. Nevertheless, Flug said she supported the reforms.

The draft law, based on the recommendations of the government’s Strum committee, also make it easier for new banks to be formed. However, the panel’s call for the banks to divest their jointly owned credit clearinghouse, Shva, is being deferred until later, under the terms approved by the ministers.

The vote was a victory for Finance Minister Moshe Kahlon, who has made competition in banking one of his key policy initiatives. He defended the measures against critics, which include the International Monetary Fund.

“There are special-interest groups that are giving the false impression that we are flooding the economy with credit. This is the opposite of the truth,” he said. “All we are doing is ensuring that those with no access to credit can get it.”