Viewpoint / It's Not Raining Rubber Checks

The sky is not raining rubber checks just yet. Israel's households aren't about to be blackballed by their bankers. The banks are waving their sabers threateningly, and they have recruited the Knesset and the prime minister in their campaign. But don't be fooled.

They may be screaming oh dear, but the public's overdraft cap is not about to become an insurmountable barrier as of January 1, 2006. It is, simply, going to change.

All the supervisor of banks, Yoav Lehman, wanted to do was clear up the mess a little. He wanted to assure that customers borrowing money from banks do so with permission, after the bank and the customer had concluded terms of the loan.

Doesn't that sound reasonable, indeed, obvious? Not under the terms of Israel's wondrous banking system. In our Levantine system, banks hand out billions of shekels through informal loans.

Formally, the loans do not exist. Nobody asked for them, nobody approved them, they are not supervised. The only thing driving them is blind faith. Yossi assumes Uri from the branch will not bounce his check and clap restrictions on his bank account. Uri assumes Yossi, a veteran customer, will remain just that - a faithful customer, no matter what interest rates Uri slaps on the extra credit.

That blind-faith method is very convenient for Yossi and Uri. Yossi doesn't have to curb his spending and start budgeting his costs. Uri doesn't have to ask anybody's permission to let Yossi keep spending, nor does it worry him. In any case, the bank earns nicely from Yossi's profligacy, and nobody in management would dream of asking bank clerk Uri silly questions.

Yoav has questions

The supervisor of banks did, though; he figured the time had come to ask questions. Not the question of whether Yossi should have credit; if the bank thinks Yossi is a good customer, then it must have its reasons. But the supervisor of banks wanted to ask questions like how the bank can supervise the credit it extends; what is its credit risk; and does it happen to have millions of customers to which it has lent unexamined amounts of dubious loan quality?

Lehman wanted to ask by what right the banks charge the interest they charge, when nobody ever agreed to the terms of the loan.

That last question is not theoretical. The interest the banks charge on excess spending above their credit limits is an enormous 7 percent to 9 percent above the prime rate. It is almost as high as gray-market interest and is certainly far beyond the risk that the customer as familiar to the bank as good old Yossi really poses. Especially as he gets a nice monthly paycheck.

Really, all Yoav wanted to do was impose some order on the chaos. He wanted the banks to stop extending loans without permissions, approvals and agreements on terms, and to stop gouging the customers through extraordinary interest rates.

He wanted the customers to stop withdrawing unsupervised loans from the banks. Both parties would sign proper loan agreements - that's all. The bank would extend credit, about the same amount as Uri uses today or even more, maybe, so Uri can keep spending at the expense of the bank. But this time, it would be done in an orderly manner.

So long chaos

At no point did the Bank of Israel demand that banks scale back their credit to the public, which it grants through overdrafts.

The new credit frameworks need be no lower than overdrafts. All the banks have to do is set a credit framework that is roughly the same as the customary overdraft.

Until now, banker Uri refrained from bouncing Yossi's checks. Nor should he start doing so now. The only difference is that Yossi's check will be honored because it will be within the pre-defined credit framework, not because the branch is doing him a favor.

So what's the problem? There is none.

All there is, is order imposed on chaos, for the banks and the customers alike.

All the customer has to do is mosey by his bank branch and arrange for an appropriate credit framework, and remove the threat of bouncing checks.

All the bank has to do is start working in an orderly manner, and stop charging their customers outrageously high interest rates. That may be what the banks don't like, hence their campaign in the Knesset.