The Shekel Drops / A Bank Is Not a Fast-food Franchise

Bank owners, take heed and tremble: Owning a bank isn't an inalienable right.

A new wind is blowing at the Bank of Israel, which will most likely shake up and scare the senior management of all Israeli banks.

The new stance at the central bank is that owning a controlling interest in an Israeli bank is not like owning a franchise for an Aroma coffee shop. Approval to own the controlling interest does not have to last forever, and it is not a guaranteed, inalienable right that cannot be proffered up for competition. As opposed to a coffee shop franchise, a banking license guarantees nothing. There is no promise of non-competition and no promise of continued control.

So what is going on here? In practice, as far as the Bank of Israel is concerned, every bank in Israel is available for takeover, friendly or otherwise. That Shari Arison owns 20% of Bank Hapoalim's shares, currently defined as a controlling holding, does not mean she may control it for eternity. If an appropriate group were to show up tomorrow, let us call it Citibank, and if it were to announce a public offer to buy up 51% of Bank Hapoalim's shares in an attempt to take control - the Bank of Israel would not be expected to say no.

A bank is different from a fast food franchise in every way - especially in terms of the enormous influence that the controlling shareholders have on the Israeli economy.

For years the Bank of Israel stood firmly alongside the controlling shareholders, in the name of stability and management continuity, because it felt that this was best for the Israeli economy. Until it discovered that the monopolistic control it granted to the controlling parties had become the problem.

Instead of strengthening and improving the banks' management, the controlling parties rewarded the Bank of Israel with the crudest form of monopolistic behavior, the behavior of someone whose status is guaranteed, and does not need to improve.

That is how the controlling interest in Bank Hapoalim deteriorated into hearing heavenly voices, and later into criminal suspicions against the bank's chairman - who had the controlling shareholder's full support, even when the alleged charges included suborning the bank's management for criminal purposes.

That is also how the controlling shareholders of Union Bank have wound up in endless infighting, and as a result some were revealed to have been doing business with the underworld - as can be learned from the story of the arbitration process at Ratio.

That is also how Israel Discount Bank's financial standing deteriorated after its controlling shareholders refused to put their hands deep into their pockets and invest more capital in the bank.

In every one of these cases the Bank of Israel found itself at the mercy of a group of controlling shareholders confident that they would continue to have control - and as a result lacked motivation to improve their behavior, or their bank's. The controlling shareholders have turned from an advantage into a problem.

That is what caused the new winds at the Bank of Israel: Those who say a bank could be run without a controlling interest at all. This is what lies behind the proposed Banking Law amendment that was presented to the Knesset last week, which details the procedures for running a bank without a controlling interest.

If a bank can indeed be run this way, then the obvious conclusion is that the Bank of Israel no longer has any strategic need to protect current controlling shareholders. If it has no concerns about a controlling group falling apart, then there is no need to protect the controlling interest and grant it sole control of the bank.

And that is what's changing at the Bank of Israel, the realization that the controlling shareholders have no promise of exclusivity. As far as the central bank is concerned, they are now exposed to competition and takeover - at any moment.

If controlling shareholders want to protect themselves, they should make an effort to guarantee control by increasing their investment in the bank. Or they should significantly improve the bank's quality of management, which would increase the bank's share price and block potential buyers. If not, the controlling owner will be competing against other investors who are no less qualified to own a bank.

The free market is the mechanism that grants control of Israeli banks, whether they have a group of controlling owners or not. In the name of the free market, last week's proposed amendment included changes as to how to appoint directors for a bank with no controlling interest. New directors will have to receive individual approval from the shareholders at the annual meeting. Shareholders will be able to nominate their own board candidates at that meeting.

If a controlling owner invests too little in the bank and holds only the minimum number of shares required to maintain the controlling interest, shareholders may well become dissatisfied with the way the bank is managed and could replace the board. The Bank of Israel would not object, and the controlling owners should take note.