BoI Sees Tycoons as a Danger to Stability

The Bank of Israel is taking on Israel's biggest holding companies, warning that these giants may endanger economic stability during times of crisis.

In its 2009 annual report, released yesterday, the central bank recommended that these firms' operations be restricted.

Among the steps under consideration are taxing dividends paid by one firm to another within a holding company, and limiting holding companies' control of their subsidiaries. The Bank of Israel's recommendations are only proposals for the Knesset to enact; the central bank does not have the authority to implement such changes on its own.

The most dramatic recommendation, discussed in the section of the annual report on "The Financial System and its Stability," is to ban holding companies from owning financial firms. Implementing such a rule would force IDB to sell off its holdings in Clal Insurance and the Delek Group to shed its controling interest in the Phoenix insurance company, which also controls the brokerage firm Excellence.

If the Bank of Israel's recommendations also apply to tycoons' direct holdings, then Mozi Wertheim, the owner of Channel 2 concessionaire Keshet and the Central Bottling Company, better known as Coca-Cola Israel, will have to sell his holdings in Bank Mizrahi-Tefahot.

Yuli Ofer, whose brother Sami Ofer's family owns the Israel Corporation, may also have to sell off his stake in Mizrahi-Tefahot. And Zadik Bino, who controls both Paz Oil and First International Bank, would be forced to choose between his holdings in financial companies and other sectors.

Shari Arison, the controlling shareholder in Bank Hapoalim and a number of large industrial firms, will find herself in a similar position.

The central bank's recommendations stem from its analysis of the main aspects of the global and Israeli economic crises. The crises raised the issue of systemic risk and failure. The question was: could the collapse of one major company endanger the entire Israeli economy? In the United States, the collapse of Lehman Brothers and the near collapse of AIG were considered significant enough to represent a possible threat to the whole U.S. financial system. The government was forced to intervene.

The Bank of Israel noted that while the collapse of non-financial firms should not have a system-wide effect, a giant holding company with financial subsidiaries was a different story. "Israel is among the most centralized countries in the Western world," the bank says.

The report states that the large holding companies control wide swaths of the Israeli economy, but the firms are characterized by "a clear tendency to focus on the financial sector." The central bank adds that these large holding companies also suffer a "low level of growth and [high] financial leverage, and therefore higher levels of risk than other companies."

The Bank of Israel also noted a number of other signs of risk for Israeli holding companies. It said the close ties between the banking sector and the business groups means that these groups would qualify as some of the banks' riskiest customers.

The supervisor of banks has already restricted bank lending to such groups: The banks must view such interconnected companies as a single group for lending purposes and credit limits.

In addition, the central bank implies that the connections within and between the various holding companies can stifle competition, reduce transparency and limit the supply of information.

Another risk, says the Bank of Israel, is that the success and failure of the various companies and much of the Israeli economy depends on the strategy, wishes and whims of just a few people, in particular the managerial skills of the next generation.