Supervisor of Banks David Zaken did not have a moment of rest in 2013. There was the storm over Bank Leumi's (TASE: LUMI) debt settlement with Nochi Dankner, Zaken's decision to cancel the banks' executive compensation plans and to order them to be redrafted, the imposition of new mortgage restrictions, publication of an outline for a bank ID card, a confrontation with the State Comptroller over the appointment of directors at Bank Leumi, and, this week, the announcement that Israel Discount Bank (TASE: DSCT) will become a bank without a controlling core. These are only some of the events that Zaken, who will complete three years in the job in January, dealt with this year.
"Globes": Your predecessors left after a four-year term. Do you plan to leave at the end of next year?
Zaken: "Although the term is for four years, I might stay on for another term. I'll have to think about it. A year in advance is too soon to talk about it."
Despite all the events of the past year, Zaken keeps cool and is not easily flustered, not even by the announcement that the Bronfman-Schron group is selling its holding in Discount Bank, leaving it without a controlling core.
Mortgages and credit losses
Last week, the banks published their financial reports for the third quarter of 2013. The reports show that, despite the economic slowdown, provisions for credit losses (which reflect the risk level of the banks' credit portfolio) declined at most banks. The average provision for credit losses was 0.23% of the credit portfolio, even though it is usually 0.5% during a slowdown and 1% during a recession.
Are the provisions for credit losses too low relative to the shape of the economy?
"We constantly examine the banks' provisions, but there is no question that the low present provisions should be reviewed."
Do you think that the provisions will stay at this level?
"The provisions reflect the economy. If growth continues, we'll see a similar level, but if the opposite happens, we'll see something else."
What will you do if you find that the banks' provisions are too low?
"We've already introduced measures on mortgages. We thought, and actually we still think, that the variables for measuring the provisions do not reflect the level of risk, which is why we set a larger group provision and we brought the mechanism into line."
Apropos mortgages, you have introduced quite a few measures to cool the market, but we still see more than NIS 4 billion in new mortgages every month. What's going to happen?
"Everyone looks at the bottom line of how many mortgages have been taken, which is wrong. You have to look at the mix. Today, mortgage leverage has fallen, the monthly repayment as a percentage of income has fallen, and the variable interest part of the mortgage has also fallen. These things mean that the risk involved in a mortgage has been reduced and that the risk in the banks' portfolios has been reduced."
So you're satisfied with the state of the market?
"I am not relaxed at all, and we're continuing to monitor the situation. Real estate prices are high, which means that the amount of monthly mortgages is high. We're still worried by the possibility of a worst-case scenario, of a sharp rise in unemployment and the interest rate and a corresponding drop in home prices or a freeze in sales. Although the probability of this scenario is low, it does exist."
Do you plan to impose more restrictions?
"You don’t have stand over us with a stopwatch. We'll act if we have to. We might act by imposing new restrictions, or we might tighten current restrictions, it all depends on where we see the problem." >P>TASE trading and the Bitcoin
Israel Securities Authority chairman Prof. Shmuel Hauser is currently working on ways of improving liquidity on the Tel Aviv Stock Exchange (TASE). The liquidity committee he formed has recommended, among other things, allowing the banks to trade on the stock market again, thirty years after they were banished following the bank share pegging affair.
Will you let the banks trade in shares
"No. We oppose that, for the simple reason that the potential conflict of interests between banking activity and trading on the stock market still exists, and it’s a large one. Moreover, the global trend is the reverse, to separate investment activity in shares from the classic banking business of taking deposits and granting credit. >p>"There must be separation, and risks must not be rolled onto classic banking activity. What's more, we still can't wipe what happened thirty years ago from our memories."
If your position is so adamant, how come the committee still published such a conclusion, when it was clear that without your consent there was no way such a step could be taken?
"We made our comments on the report, and set out our position on the matter."
Meanwhile, the Bitcoin story continues to make waves. It emerged last week that coins worth $100 million had been stolen.
The banks have asked you for clarifications on whether they should enable customers to trade in the controversial currency. What's your position on that
"We're examining the matter. The Bitcoin could be a pyramid and it could be a genuine currency. If a customer wishes to buy Bitcoins with his money, he can, but whether it should be treated as a regular currency is a question that needs to be examined in depth."
Banking ID card
A few weeks ago, Zaken released a draft circular on the banking ID card, whereby starting a year from now every bank customer will receive a document setting out their assets and liabilities, and, in the most dramatic change, customers will receive their bank credit ratings, which is intended to boost competition and assist the customer in obtaining offers from competing institutions.
The publication of the intention of implementing the bank ID card raised quite a stir, and there was even a debate in the Knesset on the negative consequences of the move.
Zaken doesn't understand all the fuss. "I don't see where the big surprise is. In the Zaken committee report we announced that we would move to establish a banking ID card; this was known. It's true that the measure isn't perfect, but we intend to introduce complementary steps together with the Ministry of Justice in order to deal with problems such as abuse of the information and validation of the models."
Why give customers information about their credit ratings?
"The information already exists at every bank. The information is about the customer and of the customer, and so the customer should receive it in an accessible fashion so that he will be able to understand it and make use of it.
"What's more, Israel one of the few countries in the Western world that has no credit bureau. Establishing a credit bureau would make the credit market more sophisticated and enable people to obtain credit in accordance with their repayment capacity. It would also diminish the phenomenon of credit denial, whereby people from various sections of the population do not receive credit because of irrelevant considerations such as ethnic group."
But there is also a negative side to releasing this information
"You have to distinguish between the main measure and its consequences. In any event, today we are not in a vacuum, the negative information is out there, whereas the credit rating is not, and it's a dynamic rating that changes, and can improve. Today, we have only the negative side. For example, there is information on hundreds of thousands of customers considered restricted. Many of them are on this list because of a file at the bailiffs."
Even so, aren't you worried about a very realistic scenario in which the weak will be hurt and will not be able to obtain credit anywhere, and will thus remain even more captive customers of the bank?
"First of all, it could be that this weak customer should not receive credit. Furthermore, in my view, such a move will increase the size of the credit cake, thus improving matters for the financially weaker sections of the population."
And what about the argument that a credit rating at one bank is no indication of the customer's true financial position, and it could be that at another bank his position is worse?
"I expect that, when it comes to granting credit, the credit rating will not be the only criterion, and other criteria will be looked at, such as how long the customer has been with the bank, whether his salary is paid into his account there, so that a fuller picture will be obtained."
The US investigation
Last week, Bank Leumi made a NIS 200 million provision for an investigation by the US authorities into suspicion that the bank helped customers evade taxes. The bank previously made a provision of over NIS 500 million. Similar investigations have been opened into Bank Hapoalim (TASE: POLI) and Mizrahi Tefahot Bank (TASE:MZTF), but neither bank has made any provision.
"I am worried about this matter," says Zaken.
Where does the Bank of Israel stand in this investigation?
"It should be remembered that the investigation is by authorities outside Israel, so most of the updates come from the banks. We're monitoring developments, and ensuring that they are properly reflected in the bank's books."
Could such an incident happen again?
"Breakdowns happen, but the probability of such an incident is very low now, because the banks have tightened the rules for handling foreign residents, especially Americans."
Do you think that the fines that the US authorities want to levy are excessive?
"It should be remembered that enforcement in the US has become stricter, and is reflected in other areas, such as the fines we saw levied in the area of mortgages."
Published by Globes [online], Israel business news - www.globes-online.com - on December 9, 2013
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