"The Bank of Israel's policy of suppressing competition comes at the expense of consumers and businesses, and detracts from economic growth," Knesset Finance Committee member Kulanu Party MK Eli Cohen, who also chairs a Knesset committee for reform, said. Cohen is in charge of putting through the reform in the financial system planned by Minister of Finance Moshe Kahlon. Cohen declined to comment directly on Governor of the Bank of Israel Karnit Flug's remarks yesterday, but added, "In point of fact, high interest rate spreads and the level of credit card charges for small and medium-sized businesses speak for themselves."
Interviewed yesterday on Channel 2 News, Flug commented on the reform proposed by Kahlon for bolstering competition in credit and the price of consumer credit, saying, among other things, "I'm in favor of reform of the financial system but it is important that it is done while maintaining stability and protecting the consumer. There is no need to look very far to understand what can happen if you open up to unfair competition for the consumer and don't maintain stability. I don't think we want to get to a sub-prime Israel. It's important that we do things in a responsible way." The Ministry of Finance and the Minister of Finance's office criticized Flug's remarks, but declined today to address them, saying that Kahlon's name had not been mentioned in the interview, and that the statement should therefore not be directly commented on.
The proposed reform is based on allowing non-banking public companies supervised by the Israel Securities Authority to issue bonds for purchase by institutions and the public. The purpose is to create additional competitive sources for retail credit. The advantage of these non-banking entities is that their costs are substantially lower than those of the banks. Even though raising capital through bonds is more expensive than from banking sources, they will be able to offer the consumer better interest rates, and create new competition for a credit customer's money. The advantage of the low interest rate will be greater for customers with high debt repayment ethics proven by a database of financial consumers planned through an amendment in the Credit Data Law, in contrast to the historically virtually absolute control of the information by Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI). In addition to public supervision by the Securities Authority of companies raising capital, the Ministry of Finance Capital Markets, Insurance, and Savings Division, headed by Dorit Salinger, will also exercise supervision and regulation.
"The Bank of Israel is responsible for the over-concentrated system"
"The Bank of Israel is correct in saying that supervision is needed," Cohen says. "Our proposal does not ignore this - certainly not. Our proposal is prudent, and includes proper supervisory mechanisms. Incidentally, the same Bank of Israel that justifiably points out that supervision is needed is unwilling to supervise itself. Nevertheless, it is obvious and clear that the Bank of Israel should provide explanations of how we arrived at such an over-concentrated and inefficient banking system with so little competition. There is no doubt that over-concentration and inefficiency in the banking system are primarily the responsibility of the Bank of Israel. There is no plan to take any disproportionate measure, but the Bank of Israel cannot hide its head in the sand and run away from the issue."
With respect to the planned reform package, Cohen says, "The reforms we plan to lead in the banking system will be well-considered and prudent, and the members of the Strum Committee have experience and the relevant professional background. There are different goals for the consumer and business sectors. The emphasis in the consumer sector is on narrowing spreads and lowering charges, while for businesses, especially small and medium-sized businesses, the emphasis is on increasing sources of credit. More credit for small and medium-sized businesses will directly enhance economic growth, while at the same time bolstering competition in various sectors and indirectly helping to lower the cost of living. A competitive and efficient banking system will be healthier and more stable in the long term. Over-concentration in the banking system in Israel is exceptional, and also leads to over-concentration in business, because there is little dispersal in credit.
"In a sector featuring profits like those of the banks, we would expect to see more banks being opened, but in the existing policy of concentration, we see the opposite: mergers between existing banks, instead of new banks opening and competing. While we see sector Internet banks all over the Western world, here they do not exist. One of the areas in which it is critical to create infrastructure is in depositors' insurance. According to a report published by the Bank of Israel, this insurance already exists in 90% of European countries. The solution for dealing with the banking system should be carried out together with the Bank of Israel, while both maintaining stability and promoting competition. A competitive and stable banking system is the basis of every growing economy."
Published by Globes [online], Israel business news - www.globes-online.com - on August 26, 2015
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