Taking Stock / Where's the Missing NIS 13 Billion?

One of the seven principles of negotiation management is the tactic of framing the discourse. If you manage to set the agenda for the argument, you're almost home.

Press reports about the battles Knesset members have been waging against the banks over fees might create the impression that change is coming. That the public, its Knesset representatives and even the Bank of Israel have had enough of paying inflated bank fees, and that it's war.

But the truth is that the battle hasn't even yet begun, and the banks have already won the most important stage of framing the issue.

Last week the Bank of Israel published an internal report, revealing that banks charge households an average of NIS 430 a year for managing their checking accounts. The report found this to be one of the highest rates in the world.

One might think this was a triumph for the Bank of Israel, the Knesset members and the public: Here was proof that Israel's banks charge too much and that regulatory intervention is warranted, whether by changing the structure of the market to promote competition, or by supervising fees.

But anybody who knows the real figures of the banking system was rolling on the floor laughing. NIS 430? Surely there's a zero missing?

Israel has 2 million households that have 4 million bank accounts. Multiply NIS 430 by 2 million and you get NIS 860 million in income from fees. You may giggle helplessly now.

Why? Because you know that according to a Bank of Israel report on banks in 2005, published four months ago, the banks' combined operating income was NIS 12.8 billion last year.

Hmm. There is a gap of NIS 12 billion between the NIS 860 million that the banks ostensibly get from fees, as presented by the Bank of Israel, and the profit and loss statements of the banks themselves.

Where does that gap come from? First of all, only half the banks' operating income comes from households. The precise proportion for 2005 was 49.5 percent, according to the central bank. That still leaves us with NIS 5.5 billion unexplained.

The answer is dazzlingly simple.

The banks, with the help of the Bank of Israel, managed to frame the issue and discuss only the tiniest part of the fees they charge households, which are for managing their checking accounts. Out of the NIS 12.8 billion in operating income that the banks reported for 2005, only NIS 1.47 billion are from managing checking accounts. That doesn't include the whole topic of payments, credit cards, credit management, contracts, computerized services, management fees and dozens of more fees, as many as the banks can dream up.

Last week the American press ran a silly story about a New York restaurateur, one Nino Selimaj, who wanted some PR. So he decided to dish up caviar pizza costing $1,000 per pie. If you read it, courtesy of TheMarker as well, you must have wondered what dolt would pay $1,000 for a pizza, and not even a cooked one at that.

But when you borrow money from the bank, you agree on interest rates, and just as you stretch out your hand to take the money the banker mentions something about fees for "documentation" - which can amount to hundreds or even thousands of shekels. How many of us understand that the fee is roughly as stupid as clammy caviar pizza? It is empty. We are not paying for much.

Or when we buy stocks or bonds for NIS 100,000 and the bank charges us "custodial fees" of 0.1 to 0.5 percent - that's NIS 500 a year, for nothing at all. For having its computer system note a few bits. We accept it, though it's as ludicrous as a $1,000 pizza.

The battle of the Bank of Israel and the Knesset over every piddling fee on checking accounts plays into the banks' hands. It distracts from the main feature, which is how to change the structure of the banking establishment in a manner to force competition over fees.

In fact, we fall victim to the banks' framing tactics at a very early stage. Why are we confining the debate to operating fees? What about interest rates? Are the interest rates that the banks charge Israel's households tied to their cost of money and risk?

They are not. The banks' provisions for doubtful debts from businesses are 2.5 times higher their provisions for doubtful household debts.

The risk in lending to households is dramatically lower than the risk of lending to businesses. Why then should the banks charge households much more? Rather, the question is how, and the answer is, because there is no competition between the banks over households, while there is fierce competition over lending to big business.

So where do those billions that the banks charge households go? "To their ludicrously high profits," you snarl.

Hah. Here is another way the banks pull the wool over our eyes. People believe banking is the most profitable business in Israel.

But if we look at the banks' profits in purely economic terms, as return on equity, we see that outside the last three years (when the banks had tremendous one-time gains from selling assets), their return on equity is rather low compared with banks in other countries.

Wait a moment; something is not adding up here. We claim that the banks overcharge households because there's no competition, but at the same time they claim that their profitability is measly.

Actually, that's right, and it works out. What's missing from that equation is the figure in our headline, which has never come up for debate at the Bank of Israel or in the countless sterile discussions about the banks at the Knesset Economics Committee.

NIS 13 billion is the wage cost of the 38,000 workers at Israel's banks.

NIS 13 billion is how Israel's banks charge such high interest and fees, and make so little, by international comparison at least.

NIS 13 billion is the real reason why the chance for fees and interest rates to drop in any significant way is all but nonexistent in the foreseeable future. The banks can't afford to lower their income because they're bloated with expensive manpower.

In the last three years, while the press slavishly follows the noises at the Bank of Israel and the Knesset, wage costs at the banks have risen by 13 percent, which is four times (!) the increase in the average wage.

Israel's banks need massive reform. All areas of their operations must be opened to competition. The Bachar reform only addressed one narrow area.

But before entering discussion on reform, one must redefine the topic at hand, not let the banks (or the Bank of Israel) frame the debate again.