It's as Bad as Incest

Board members of one of the large banks recalled the HIV commercial that was on TV a few years ago: when you're sleeping with your girlfriend, you're also sleeping with your girlfriend's boyfriend, and with the girlfriend of your girlfriend's boyfriend..." Naturally, the directors were not concerned with AIDS, but rather with the intention of Yoav Lehman, the supervisor of the banks, to halt the incestuous relations among the major borrowers in Israel.

Banks are forbidden to extend more than an equivalent of 30 percent of their equity to any single group of borrowers. Lehman is now seeking to lower the threshold to under 30 percent. This will mean that some clients will be forced to repay their debts and look for other financing alternatives.

Any such new provision, bank sources explain, would turn many of the large borrowers in Israel, who are connected through various business enterprises, into a single group of borrowers. Thus, whenever a bank extends a loan to Fishman, it would also affect Dankner; and if a credit line is given to Dankner, it would affect Arison; and if Arison gets a loan, it will certainly affect Leviev. Because Fishman and Dankner both have stock in cable TV and want to merge, Dankner and Arison are shareholders at Bank Hapoalim, and Arison and Leviev are partners in the Trans-Israel Highway.

These kinds of interrelations exist between all major domestic players. In fact, under a revised instruction, the business sector in Israel comprises no more than four or five groups of borrowers. Consequently, all new investments by these major players would be completely halted. So much so, that this could create a macroeconomic problem. Or would it?

Many bankers and businessmen are wracking their brains these days searching for the exact interpretation of the word "substantial." A draft Lehman sent the banks stipulates that "a group of borrowers would also include borrowers that are connected by substantial relations, such that if the financial stability of one is compromised, that of the other might also be, or that the same factors are liable to impact the financial stability of both."

Lehman maintains that this instruction is consistent with standards practiced around the world. The first instance of what this policy would mean became evident in the planned merger of the cable companies. Some say that it has lent the final blow to any such merger. The banking supervisor stated that the NIS 5 billion debt of the merged cable company would be attributed in full both to Eliezer Fishman and to the Dankner family.

What this means is that Fishman and Dankner would find it hard to secure any further loans from the local banks, because they will be nearing the 30 percent limit. For now, Fishman and Dankner find financial flexibility to be more important than going ahead with the cable merger.

The main problem with the new provision, the banks say, is that the supervisor did not spell out what substantial ties actually are, and leaves it to the banks to decide on a case-to-case basis. He leaves it to the banks to decide whether Wertheim and the Ofer brothers, who together control United Mizrahi Bank, constitute a group of borrowers. If so, than Coca-Cola Israel, owned by Wertheim, and the Ofer brothers' Israel Chemicals, also belong to the same group.

"We know how to calculate whether extending credit would be worthwhile, but we do not know what kind of discretion to exercise to distinguish groups of companies and subsidiaries that are controled by large borrowers," bank sources complain. Last week, they voiced their grievances at a meeting with the supervisor. And what did Lehman say?

"He just listened," one senior banker recounts.

One of the banks' main arguments was that imposing such a far-reaching restraint on large borrowers would cause macroeconomic problems. After all, it is these same interconnected borrowers that take part in all the important tenders and deals. If their moves are limited, there will be no one to handle these enterprises.

Interestingly enough, the supervisor's starting point is the same as that of the banks'; it is only their conclusions that vary. The Supervisor holds that the economy is too inbred, as evidenced by the fact that 71 percent of all credit extended in 2002 was given to only 1 percent of the banks' clients. It therefore makes sense, Lehman maintains, to reduce the dependence of such clients on one another and the dependence of the banks on these clients. Lehman's long-term objective is to create alternative financing resources that reduce the pressure on the banks and make the economy less dependent on the banks.

The banks admit that the economy is very concentrated. But things being as they are, the major players must not be restricted, because if they are, there will be no one to invest in infrastructure and growth-generating projects. This would lend a severe blow to firms' growth potential, the banks say. But this explanation does not hold water.

If the large players' growth potential depends entirely on leveraging and bank credit, and if a large portion of their deals merely transfers possession of assets among themselves - how does this contribute to growth?

Stopping the growth of heavy credit consumers, and allowing an opportunity for new players to emerge, seems more likely to open up the market. It would reduce the banks' dependence on large borrowers, whose fall might drag the entire banking sector down with them, and would help alternative financing mechanisms to develop. Both are good for the banks.

In 1996, the banks were required to sell their holdings in various corporations. They objected and squirmed, but eventually were forced to comply. Thus, ownership of assets such as Africa Israel Investments, Migdal Insurance, Delek Israel Fuel Corporation, Ampal, Poalim Investments and Koor, which before that were owned by the two major banks - was distributed among several investors, such as Leviev, Generali, Yitzhak Tshuva, Benny Steinmetz (and then Yossi Maiman), the Shrem group and Jonathan Kolber. If Lehman's new instruction is implemented, more new investors can be expected.