The Bottom Line / Going Cold Turkey

Banking sector executives and Bank of Israel Supervisor of Banks Yoav Lehman are waging a battle over the character of the Israeli business world in the coming years.

Banking sector executives and Bank of Israel Supervisor of Banks Yoav Lehman are waging a battle over the character of the Israeli business world in the coming years. If Lehman's stance is victorious, we can look forward to a substantial change in the stature of some major businesspeople.

A few weeks ago, Lehman issued a draft instruction expanding the definition of a "borrower group" - companies that are interconnected with mutual guarantees and cross-ownership.

The definition is not academic, as banks are limited in the credit they can grant a group of borrowers; up to 30 percent of the bank's equity.

The new instruction, however, expands the definition of the term, determining that "a group of borrowers will also include borrowers who have substantial ties such that damage to the financial stability of one of them could have ramifications for the stability of the other, or the same factors could impact the stability of both parties."

Lehman's handling of the matter stems from his concerns regarding the high concentration of credit in Israel, and the need to reduce the risks to which the banking sector is exposed.

The first implementation of the new policy came when the cable companies sought to merge. Lehman determined that the merged company's entire NIS 5.5 billion debt would be attributed to both the Dankner family, which owns Matav Cable Systems Media, and to Eliezer Fishman, the controlling shareholder in Golden Channels.

As a result, the Dankners and Fishman could be very close to that 30 percent limitation, meaning their business activities will no longer be able to rely on local credit. This essentially torpedoed the cable company merger.

The instruction could also impact the business activities of other highly leveraged businesspeople, such as the Ofer family, the IDB concern, state-run telephone company Bezeq, Arison Investments and Mosie Wertheim. The banks say the instruction will mean some big clients must repay loans on the spot, while other borrowers will find existing credit lines frozen. The biggest credit consumers will have to go cold turkey.

High concentration is one of the prominent characteristics of the Israeli economy. Almost every sector has two or three major players who dominate the market. This is true in banking, insurance, cellular communications, multichannel television, foodstuffs, and even the print media.

This concentration is not resolvable, but there may also be no need. However, the concentration of bank credit is a dangerous phenomenon for the economy and the stability of the banking sector. According to Bank of Israel figures, 1 percent of borrowers received 71 percent of credit in 2002. If growth and investment are based primarily on bank leverage, there is no reason to concentrate credit in the hands of a tight group of borrowers, since the bank's dependence on them could destabilize the banking sector.

The more desirable step is to scatter credit among many clients, thereby reducing risk. This will also create a new group of investors - leveraged, yet new.

Meanwhile, alternative financing channels would be developed on the financial markets or at foreign banks that would reduce the dependence of the Israeli business world on the local banks. In the end, a strong banking sector is in the best interests of the major credit consumers too.