The Center Shall Not Hold

Few areas in the Israeli economy are as centralized as banking and insurance. The five largest banks and the five largest insurance companies control 90 percent of their respective spheres of activity.

On August 25, the CEO of Bank Hapoalim, Eli Yunis, and the CEO of Bank Leumi, Galia Maor, were asked by the accountant general of the Finance Ministry, Nir Gilad, to attend an urgent meeting, that very evening, at the ministry. Gilad wanted the banks to buy the deposits and credit portfolio of the Industrial Development Bank and thus extricate the bank and its owner - the state - from the dire straits in which it found itself.

Yunis and Maor made any transaction conditional on a prior examination of the bank's business, with the result that the meeting ended inconclusively.

That night meeting made it plain to anyone who didn't know that Israel's two largest banks have so much power that they are the only institutions capable of rescuing the state from a mess like the Industrial Development Bank. Together, the two banks account for 65 percent of the banking market in Israel, and in certain spheres of activity, such as households, even more.

A credit crunch has afflicted the banking system in the past year, due to the losses in the business sector, and only Hapoalim and Leumi still have the concrete ability to make credit available and execute transactions on such a scale.

Acquiring the portfolio of the Industrial Development Bank could multiply their power and thus replicate what happened a decade ago in the insurance business. When Hasneh, the insurance company that was owned by the Histadrut federation of labor, crashed in 1992, two other insurance companies, Migdal and Clal, bought its policies portfolio in a night transaction that was concluded in the Finance Ministry. This perpetuated the control of Migdal and Clal in the insurance sphere, where they wield the same clout as Hapoalim and Leumi do in the banking realm.

Few areas in the Israeli economy are as centralized as banking and insurance. The five largest banks and the five largest insurance companies control 90 percent of their respective spheres of activity. The three major players in each sphere dominate 75 to 80 percent of the activity. In addition, the reciprocal relations between them have become stronger in recent years through a series of transactions. The country's largest bank, Hapoalim, purchased 20 percent of Clal Insurance, Israel's second largest insurance company. Israel Discount Bank, the third largest bank, acquired 20 percent of Harel, the fourth largest insurance company. Bank Leumi, Israel's second largest bank, has historically held 20 percent of the capital of Migdal, Israel's largest insurance company. And Migdal purchased 9.5 percent of Bank Leumi's capital, while the veteran insurance magnate Shlomo Eliahu purchased 10 percent of Leumi - both with the intention of competing for control of the bank.

The centralism in the financial sector is not confined solely to cross-ownerships, but extends to credit and financing arrangements as well. For example, five years ago, Bank Leumi, Discount Bank, United Mizrahi Bank and First International Bank financed Arison-Dankner's acquisition of control of Bank Hapoalim. The group received a loan of NIS 3.2 billion from the banks, out of a total of the NIS 4.8 billion that they paid for 43 percent of Hapoalim.

Now another large-scale transaction is being concocted, which could further intensify the centralism in the financial sector. Migdal Insurance is interested in acquiring control of Mizrahi Bank - the same Migdal that already owns 9.5 percent of Bank Leumi, which in turn holds 20 percent of Migdal's capital.

In the light of the threat of centralism, this proposed transaction will certainly encounter difficulties on the part of the antitrust commissioner and the Bank of Israel. However, the trends in the insurance market and in the banking system, and in the interface between them, require, it seems, treatment not only in the case of a specific deal, but also an in-depth examination of all the reciprocal relations between the two branches. For this cooperation to benefit consumers, too, it is essential to ensure that the level of centralism in the banking and insurance sectors does not grow, that competition is heightened and financial stability be reinforced.