Flexing Muscles While Bank Burns

The Bank of Israel and the Finance Ministry last week published soothing comments on the the state of the Industrial Development Bank.

The Bank of Israel and the Finance Ministry last week published soothing comments on the the state of the Industrial Development Bank. The centerpoint was a central bank credit line to finance huge withdrawals from the bank, and the treasury's agreement to give preference to the public's deposits over the state's.

In background talks, various players asked Israel's financial journalists to explain to the public that there is no reason for panic, and it is illogical to withdraw funds with the expense of an early-redemption fine, because there was enough money for everyone.

The all-clear sirens didn't help, and between June 30 and August 28 the public pulled NIS 1.082 billion in deposits out of the bank. Most of the run on the bank took place in the last ten days since the bank published its profit warning, and urgent discussions began on how to stabilize it.

The bank's financials published Friday provide plenty of worries for anyone who has stayed calm and not withdrawn their money. The management review notes "accelerated redemption by the public has led to serious liquidity problems that put the bank's continued operation as a banking corporation in doubt, as well as its ability to repay debt."

The reason is that the treasury and the central bank did devise a solution, but cannot implement it because of squabbling between them. From the point of view of the depositing public, this is a very worrying message and it is possible the run on the bank will resume today with renewed vigor.

Industrial Development Bank's management says that despite the agreement it has still not received the credit lines, and is therefore NIS 813 million overdrawn at the central bank. With killer interest of 48 percent per annum - NIS 9.5 million a week at current rates - no institution could withstand the financing costs.

On Thursday, Supervisor of Banks Yitzhak Tal sent a letter ordering the bank to repayits debt within a week or face orders to cease various activities. A senior central bank source said the move protects depositors and prevents the bank from granting credit that will worsen its situation.

Semantics reveal Tal trying to pressure the treasury through the bank. The dispute is over who will finance the huge withdrawals from the bank and where the loan the bank gets will appear - on the Bank of Israel's balance sheet, or the Accountant General's.

Presumably, Tal and Accountant General Nir Gilad flexing muscle at one another should be of no public interest - but they are doing so at the expense of Industrial Development Bank and could leave it unable to meet commitments.

The dispute is just more of the same negligent, bumbling management that has led the bank down the primrose path to its coming demise. What was dubbed a "friendly closure" could become a premature and far more nasty shutdown. All that might be left for the bank to sell will be its loan portfolio. The the deposit portfolio will be empty.