Good News for Israel's Banks

Shari Arison’s decision to sell her controlling interest in Bank Hapoalim heralds a new era for Israeli banking

Shari Arison, the richest woman in Israel, listens during an interview with Reuters in Jerusalem November 15, 2009
Baz Ratner \\ REUTERS

Shari Arison’s decision to sell her controlling interest in Bank Hapoalim on the stock exchange, and to do so in a decentralized way, is good news for the banking system.

Arison inherited control of the bank from her father, and in her years as its owner didn’t demonstrate any special interest in banking and didn’t bring it any added value. As a result, the bank fell victim to executives who caused it great damage. Chief among them was Danny Dankner, the bank’s chairman, who was forced out, convicted of crimes and served two prison terms (one for crimes committed at the bank and one for his involvement in the Holyland bribery case).

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Hapoalim, the country’s largest bank, has been beset by scandals in recent years, including massive losses due to investments in U.S. mortgage-backed bonds; its crony banking for several former tycoons, led by Nochi Dankner; embarrassing sex scandals and its troubles with the American tax authorities for helping U.S. clients evade taxes.

A decade ago Arison found herself the sole controlling shareholder of the bank, after she bought out American investors and the Dankner family. This left the bank without the necessary checks and balances on the board of directors and exposed its inability to forge proper corporate governance. Now that Arison will be giving up control, Hapoalim will become the third bank to operate without a controlling stakeholder. The two others, Leumi and Discount, have been operating that way in recent years and so far the model hasn’t disappointed.

It will be a new era for Israeli banking. Once Arison sells off her stake, 75 percent of Israeli banking operations will not be managed by controlling individuals, but under the authority of management and the board of directors. Moving to this model doesn’t guarantee things will go smoothly, however. In the United States, where most of the financial system operates without controlling stakeholders, there were huge foul-ups that caused the collapse of several large banks during the crisis of 2008.

To ensure the transition to the new model goes well, the Bank of Israel must closely supervise the process. This requires maintaining the independence of the central bank to ensure proper supervision and effective, professional regulation. This should go without saying, but in recent years the government has weakened many gatekeepers, such as the Antitrust Authority, the Electricity Authority, the Capital Market and Insurance Authority and other agencies.

Politicians and businessmen tend to blame all economic maladies on “regulation.” These claims are not serious, certainly not with regard to the public’s savings. The new ownership structure of Israeli banks requires close supervision and control, to make sure that they do not fall prey to excessive executive rule or de facto control by tycoons.

The above article is Haaretz’s lead editorial, as published in the Hebrew and English newspapers in Israel.