Banking Reform: Revolution of a Different Sort

Lenders are no less in need of a shake-up than the cell phone sector, but the challenges differ.

Probably not many of the Israelis who took to the streets last summer, howling over the cost of living, specifically had the Israeli banking system in mind.

Despite the natural opprobrium that many feel toward banks, here and everywhere else, and even though the global banking system drove the planet into recession, most Israelis didn't connect the impossibly high cost of living and of housing, inequality and other ills directly to the structure of the Israeli banking system. When the masses have knowledge, they have power - but without knowledge it's rather difficult to link the banks to those ailments.

One man who did connect the dots was Manuel Trajtenberg, economic adviser to the prime minister and chairman of the committee the government hastily cobbled together in reaction to the social unrest. Trajtenberg understood perfectly well that he could seize the day and make history.

Thus, even though no one specifically tasked him with tackling the banks, the Trajtenberg committee recommendations include the establishment of another committee to study the state of competition in the banking system.

Trajtenberg grasped that the terrific leverage the banks routinely exert over politicians - and the press, for that matter - preclude the government from reforming the banks. He understood that the social-justice protest, which gave the unrepresented general public a voice, created that historic opportunity.

The committee was formed and headed by Supervisor of Banks David Zaken. Its recommendations generally moved in the right direction, but no further than a baby step, and the banks won't find it especially taxing to step backwards once the fuss dies down.

Cell phone doubters proven wrong

Meanwhile, the Communications Ministry's reform of the cellular industry lowered prices for low-grade packages by as much as 90%, as new operators leaped into the market. One morning, Israelis woke up to an astonishing new reality, in which the cost of a crucial service (cellular communications ) had dropped like a stone down a well, and all because of regulatory changes.

Just a year before, some of the tycoons' pet newspapers had been learnedly explaining why the reforms being driven by Communications Minister Moshe Kahlon were populist, devoid of any true moment, and wouldn't really lower prices after all. Some even claimed that Israel's telecom market was perfectly competitive and that cellular-service prices in Israel were perfectly normal.

After seeing prices plummet by 90%, the public wants more. The extraordinary developments in the cellular sphere merely whet the appetite for reform.

But can the public extrapolate a reform at the banks from the reform of the cellular industry? Yes, it can. Here are some of the similarities, and differences, between the cellular reform and the potential reform of the banks:

• Prices: Israel's banks charge insanely high fees for service, and also insanely high interest rates, just as the cellular companies charged insanely high fees twice and thrice the norm elsewhere in the world. Customers without clout (such as small businesses ), who couldn't inveigh upon the companies to charge reasonable prices, sometimes paid several times more than the going rates in the world.

The rub is that it's easy to compare prices of cellular services, relatively speaking. Comparing the prices of bank services is much trickier. For instance, when it comes to interest rates, the price of service derives directly from risk. The banks argue that they have to charge households and small businesses high interest (way above competitive pricing ) because of the risk to these sectors.

But when discussing appropriate interest rates, one also has to look at provision for doubtful debt, and households and small businesses actually repay loans for the simple reason that they have to. The Israeli banking sector is extremely concentrated and welshing on a debt is a good way to get hounded for life. That applies of course only to the little man, the households and small businesses; tycoons can shrug off debt with impunity and continue doing business with the banks in peace.

The money trail

• Where is the money hiding? Before the reforms, the monopolistic cellular companies accrued some NIS 15 billion in profit over some seven years. Where did that money go?