The Bottom Line / Where Is the Deductible?

The government decided yesterday to fully guarantee the deposits of Trade Bank customers, up to a ceiling of NIS 4 million, and to cover 95 percent of the amounts in excess of this sum.

The government decided yesterday to fully guarantee the deposits of Trade Bank customers, up to a ceiling of NIS 4 million, and to cover 95 percent of the amounts in excess of this sum. The government's decision was called for in the absence of any national bank deposit insurance plan along the lines of the Federal Deposit Insurance Corporation (FDIC) in the United States.

Theoretically, the government could have decided not to cover the sums deposited in the Trade Bank, which was devastated by a NIS 250 million embezzlement scandal, but this might have threatened the stability of other small and medium-sized banks, resulting in a much more serious crisis.

While the question of granting deposit guarantees itself seems justified and logical against the backdrop of the economic situation and concern for the stability of the banking system, the high level of compensation is not a foregone conclusion.

For years, there has been a general understanding that "the government will not let the banks crash." The decision of the government regarding the Trade Bank strengthens this attitude and leaves little doubt in the mind of depositors, who will continue to assume that this will also be the practice in the future. This kind of assumption could lead customers into adventurous and even doubtful investments. It is not clear what interest the state has in encouraging this type of behavior.

Elsewhere in the world, it is customary to provide compensation up to a certain limit and, in many cases, the client is required to pay a deductible on his compensation award. In the United States, for example, a single deposit can be insured to a maximum sum of $100,000.

Some two years ago, the Basel Committee, which formulates professional regulations for the banking systems of the world, issued a number of recommendations on deposit insurance. These recommendations included imposing a deductible on depositors, determining the insurance premium at each bank according to its level of risk, and not extending insurance retroactively.

In the case of the customers of the Trade Bank, the government did not act in accordance with these rules. Rather than tackle the economic, social and educational questions raised by the affair, it seems that the government's main objective was simply to put out the fire - and as quickly as possible.

This approach may have been correct on occasion in the past, but the collapse of the Trade Bank provided an opportunity to define new rules for the game that would have formed the basis of establishing a system of deposit insurance. Such game rules are essential for getting people more involved in selecting their bank and for increasing the responsibility of managers of banks - large and small - for the risks they take.

The government could have decided, for example, to define even a small deductible for sums less than NIS 4 million. After all, if the government provides NIS 200 million in compensation at the taxpayers' expense, this means that every household in Israel will need to pay NIS 114.40 to finance this expenditure. Why impose this payment on customers who were not tempted by the high interest rates offered by the Trade Bank? Why not demand a certain deductible payment from those who did succumb to this temptation?

The Bank of Israel will soon formulate its policies on establishing a system of deposit insurance. Seemingly, the central bank will base its formulation on the Basel Committee regulations and can be expected to come up with a less generous arrangement than the one approved by the government yesterday.

In the end, it will turn out that Trade Bank customers will receive much greater compensation than the customers hit by the next bank to collapse in Israel.