Israeli banks surprised by EU sanctions threat

Europe

The banks say they cannot cope with such a threat, and it is up to the government to do so.

The banking system was very surprised by yesterday's report by Reuters about possible European Union sanctions against Israeli banks. The capital market also responded sharply to the report, with the bank shares falling in response to the Reuters report. The share price slide was led by the banks with substantial overseas business: Bank Hapoalim (TASE: POLI), Bank Leumi (TASE: LUMI), and Israel Discount Bank (TASE: DSCT), which lost about 2.5%.

The banks are aware of the boycott issue: in recent years, several institutional concerns in Europe announced they would boycott Israeli banks because of their business beyond the Green Line. Up until now, however, the boycott has been confined to the sale by these institutions of their holdings in Israeli banks, and the damage has not been especially great. What is involved now is much more significant - European Union sanctions on working with Israeli banks, and/or sanctions against their business in Europe.

"For the European, the settlements include Jerusalem and the Golan Heights, which means that almost all the banks are involved. It is hard to quantify the threat, but it is dramatic," a senior banking source said. "This is liable to prove an extremely significant threat to the banks, more so than the conclusions of the Strum committee, which is currently working on enhancement of competition in the banking system."

The banks say they cannot cope with such a threat, and it would not be right for them to do so. They assert that the response must be on the governmental level. The regulators, however, sound less concerned about the matter, at least in public. "It appears that what are involved are the recommendations of a body providing consultation to the European Union, not a decision by the European Union itself. It is worthwhile waiting for the decisions themselves and considering their significance, instead of going into a panic at every report by Reuters," a government source said. "I fear that the government does not realize what this means," a banking source who spoke with the regulators said.

In its report, the European Council on Foreign Relations writes that by pushing harder for separation between the European Union's relations with Israel and the Jewish communities in Judea and Samaria, Israel will be forced to choose what type of relations it wants with Europe, and will choose to return to talks with the Palestinians about a two-state solution.

The more significant proposal in the report concerns banking, a sector in which the major Israeli institutions conduct daily business with their European counterparts, and also provide loans and financing to Israeli businesses and individuals living and operating in the territories. According instructions issued by the European Commission in 2013, loans by countries and companies in the European Union cannot be provided to Israeli entities operating beyond the Green Line.

In theory, because the UK government controls several banks that were nationalized following the 2008 financial crisis, these banks are enjoined from providing financing to Israeli banks with business in the territories. "Are the daily contacts between the European and Israeli banks compliant with the European Union demand not to provide material support for the occupation?" the report asks.

The issue extends to loans and mortgages. In theory, an Israeli with dual European citizenship who is a resident of Judea or Samaria cannot mortgage his home in the Jewish communities there for a loan from a European institution, because the European Union does not recognize Israeli deeds beyond the Green Line. Another area in which the European Union may be violating its rules is tax exempt European charity organizations and donations whose donations pay for activities in the territories. Under international law, these are considered illegal. The report even reflects about the European Union's ties with institutions such as the Ministry of Justice and Israel Police Headquarters, which are located in East Jerusalem.

Published by Globes [online], Israel business news - www.globes-online.com - on July 23, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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