David Zaken said on Sunday he would be stepping down at the end of June as Israel’s top bank regulator after a four-and-a-half-year term in an era of global banking turbulence, during which he acted to ensure the stability of Israel’s lenders and limit their exposure to mortgage lending.
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Zaken was supposed to end his term as banks supervisor at the Bank of Israel in December, but he agreed to stay on to complete a program he was working on to increase competition among banks. Bank of Israel Governor Karnit Flug is expected to appoint a committee to name a successor in the next several weeks.
Under the law, Zaken must wait at least a year before he can accept an appointment at one of Israel’s banks. Sources said he was likely to wait much longer – perhaps as much as four or five years – before he would seek to be appointed chairman of one of the big banks so as to remove any doubts about conflicts of interest.
In the meantime he is expected to take up a teaching post at one of Israel’s business schools.
Coming into his job on the heels of a global banking crisis, Zaken devoted much of his term in office to ensuring that Israeli banks were adequately prepared by adopting the international Basel III standards, designed to protect lenders in the event of a run on banks by requiring them to set aside reserves for differing forms of deposits.
Basel III forced Israeli banks to increase their combined shareholders’ equity by about 30% – from 74 billion shekels ($18.8 billion) in 2010 to 96.5 billion shekels in the third quarter of 2014. To do that, Israel’s bank had to suspend dividends to build up cash.
Basel III also forced the banks to adjust their lending to avoid excessive exposure to the country’s big business groups. As a result, banks stepped up lending to households and small businesses at the expense of big businesses.
Zaken’s other main task, as he saw it, to ensure the soundness of the banking system was to reduce the bank’s exposure to real estate lending, which at its peak reached 44% of their loan portfolio.
One way he did this was to put a ceiling on mortgage lending to 75% of the value of the home being bought, as well as on variable-interest loans and on the maximum amount a borrower could sign on to pay back as a percentage of his or her monthly income.
The measures were supposed to reduce the risk of a burst housing bubble leaving banks saddled with bad loans, but the plan didn’t work. The value of new mortgages grew to 281 billion shekels last year, from 200 billion the year before Zaken took office.
He entered office just six months before the 2011 social-justice protest exploded across Israel. He implemented some of the proposals of the Committee to Examine Increasing Competitiveness in Banking that was formed in the protests’ wake. They included creating a framework for Israel’s first credit unions, directives that allow bank accounts to be opened over the Internet, and the creating of a single annual report, known as a banking ID document, that details all the client’s assets and liabilities, income and expenses.
But a proposal to begin consumer credit ratings, perhaps the committee’s chief recommendation, never got off the ground because of concerns about the damage it would cause people with low ratings. Likewise, little was done to increase banking competition.
Zaken also oversaw regulations that for the first time to enable them to deal with a bank that had no controlling shareholder. His 2012 directive required controlling shareholders of Israel’s two biggest banks – Hapolaim and Leumi – to hold at least 30% of shares outstanding. For medium-sized banks, the minimum was set at 40% and for small banks at 50%.
The move came after the government sold off its controlling stake in Bank Leumi at the same time that Zaken refused to give Shlomo Eliahu, who had built up a 10% stake in Leumi in the hopes of gaining control, a banking license.
Matthew Bronfman and Rubin Shron likewise sold their controlling stake in Israel Discount Bank in the stock market.
The impact of Zaken’s ruling will likely be that Mizrahi Tefahot Bank will also lose its controlling shareholders, the Wertheim and Ofer families.
Muzi Wertheim was informed last month he would not be able to pass on his Mizrahi shares to his children, to avoid running afoul of a law barring the same shareholders from owning a bank and a major non-bank enterprise. For the Ofer family to retain control alone it would have to raise its stake in the bank to 40% from 22.5% today, which the family is unlikely to do, and thus will likely divest all its stake.