After a long period of discussions, and before the drafting of the final report, Minister of Finance Moshe Kahlon, Governor of the Bank of Israel Karnit Flug, and Supervisor of Banks Dr. Hedva Ber presented to the government today the main conclusions of the Strum committee for the improvement of competition in the banking system among households and small businesses, chaired by former Antitrust Authority director general Dror Strum. According to sources close to the Ministry of Finance, the final report and the draft bill will be published within two weeks.
"Today we can announce that after 49 years in which no new bank has been set up in Israel, the way has been paved for the founding of new banks. The understandings we have reached in the past few days with the Bank of Israel allow unprecedented possibilities. All the committees on the matter so far have not dealt with the middle class, those of slender means, and small and medium-size businesses. The committee's conclusions deal precisely with these groups, with citizens who have been compelled to cope with the concentration in the banking system," Kahlon said today.
"I am happy that, in the end, after great effort by all concerned, we have succeeded in formulating good recommendations for the benefit of consumers, while preserving the stability of the system," Flug said.
Relations between the Ministry of Finance and the Bank of Israel have had their ups and downs over the Strum committee recommendations. There were material differences of opinion that were not resolved when the interim recommendations were published six months ago. In the past few weeks, however, marathon talks took place between Bank of Israel and Ministry of Finance officials to iron out the disputes, and it appears that most of them were resolved, although the final details have yet to formulated.
Kahlon, who is determined to proceed with implementing the conclusions, decided to present them at this week's government meeting. The Bank of Israel was notified of this intention last week, and on Thursday Ber updated the CEOs of the banks about the expected conclusions.
Allowing the banks to adapt
Apart from compromises on specific matters, the Bank of Israel obtained agreement in principle from the Ministry of Finance that no legislative changes will be introduced affecting the banking system apart from those agreed in the committee's conclusions. The object is to avert a scenario in which Kahlon comes to the Knesset with a bill that, with the Knesset's enthusiasm for acting against the banks, becomes a law that is eventually passed with different wording not agreed with the Bank of Israel. This happened recently with the executive pay law, which was eventually passed in a much tougher version than the one with which Kahlon came to the Knesset.
Flug commented on this, and said, "It is most important, and we have agreed this with the Ministry of Finance and its team, that we now focus on implementing the reforms, and, in general, that we avoid promoting legislative initiatives concerning the banking system or supporting such initiatives. The change we are proposing here is a major change, following on from changes already introduced, and it is important that we should manage these changes responsibly and allow the banking system adapt itself and prepare for them."
"Genuine good news for small businesses
The Strum committee recommendations are on several levels. On the credit card companies, it was agreed that Isracard and Leumi Card will be separated from the banks, while CAL will remain controlled by Israel Discount Bank (TASE: DSCT) and First International Bank of Israel (TASE: FTIN) for four years, after which the future of control of the company will be decided.
The Strum committee initially intended to forbid the banks to issue credit cards, but, in the end, in order to avoid a situation in which the credit card companies are a monopoly, and even raise prices, it was decided to allow the banks to issue credit cards, subject to restrictions. In the first place, the banks will have to reduce credit limits on the cards by 50%, to assist the credit card companies in competing with them. In addition, the banks will be allowed to offer a customer a new card only during the period immediately after the expiry of the old card. The rest of the time, only the credit card companies will be allowed to offer cards, and will need to make an attractive offer that will compete with the benefits offered by the bank.
All the banks will be obliged to work with three credit card companies, and market share limits of 40% will be set for cards issued by each company.
The Ministry of Finance and the Bank of Israel want to see the credit card companies become banks, and intend to offer them concessions and incentives to encourage them to do so.
A significant victory for the Bank of Israel is that regulation of the credit card companies will remain with it. On the other hand, an important achievement for the Ministry of Finance is the substantial concessions on capital and capital adequacy (the ratio of shareholders' equity to the credit portfolio) of the new companies. In this context, it was decided that the minimum capital required of the new banks will be reduced from NIS 400 million to just NIS 50 million. The new companies will also be subject to no capital adequacy requirement for the first four years of operation, or until they reach shareholders' equity of NIS 600 million, whichever is the earlier. Credit associations will be given even more significant concessions, and it is possible that initially they will not be subject to any minimum capital requirement.
Yehuda Talmon, chairman of cooperative bank Ofek, which is in the process of setting up a credit association, told "Globes" today that this was positive and dramatic news. "This is genuine good news for small businesses and households, and I can only congratulate everyone involved. As soon as the recommendations come into force, Ofek will start to operate as a credit association within four months. Ofek currently has 3,600 members, and we intend to step up our marketing significantly."
Published by Globes [online], Israel business news - www.globes-online.com - on June 13, 2016
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