Viewpoint / Wired Up and Down the Land

One has to be an incurable optimist to believe the Finance Ministry can enforce the law splitting up the Israel Electric Corporation.

The law passed among the welter of bills the treasury pushed through at the height of the economic crisis in 2003. Things were going so badly that the frightened parliamentarians were approving every proposal the treasury raised.

Thus the law shattering the IEC some time this decade overcame the parliamentary hurdle. But don't bet your house that the law will remain in force by the time its deadline expires.

In any case, the law related only to the power stations themselves. They are supposed to be incorporated into companies that compete over power production. The power lines in use up and down the land will remain a monopoly. The legislator understood that it would be purely impossible, not to mention dim-witted, to set up a double wiring system.

The distribution monopoly

Banking isn't much different from electricity. The banks also have a network of wiring deployed up and down the land, in the form of hundreds of bank branches. Via them, the banks reach all Israel's investors, advising them how to manage their assets.

That is what's known as the banks' distribution network, which apparently faces no competition. Like the power lines of the IEC, the banks' distribution network is a "natural monopoly," meaning, a network against which there cannot be, perhaps should not be, competition.

One could insist that the distribution network of the banks be dismantled. Just as the banks seem to be about to lose their grip on their provident funds and mutuals, one could sever them from their networks, too, by forbidding them to distribute capital market investments. But that would demand massive investment in setting up a rival network of branches by somebody else, a move that would be as absurd as building a rival network of power lines.

Alternatively, one could settle for other types of distribution networks, such as insurance agencies. But they have proven far less efficient than the banks' branches.

So the banks will evidently get to keep their natural monopoly. That imposes a substantial structural limitation on the capital market. If you dreamed of breaking the banks' power by taking away their provident funds and mutuals, and their underwriting companies, start dreaming of something else. They will be retaining a large part of their power.

It doesn't matter who winds up owning the provident or the mutual funds, or who takes private companies public. The main way to sell the funds to the public, and the only way to bring buyers to shares, will still pass through the bank branches.

Realistic expectations

In that reality, the banks will be able to continue exploiting their monopoly to determine who will succeed in selling investments in the funds. They can prevent the distribution of competing products, such as offerings of bonds that could serve as an alternative to savings, or for companies, as an alternative to bank loans. The banks can continue charging sky-high prices for distribution, leaving almost the entire fee of managing the funds in their own hands.

That is a harsh reality that colors the expectations one may have of the Bachar committee, which is thrashing out a reform of the capital market. However far the reform reaches, however lofty its goals, Israel's capital market won't be facing a new era the day the reform is revealed.