Israel’s Finance Ministry is planning sweeping reforms of the country’s capital market and the banking sector. The reforms have the support of Finance Minister Benjamin Netanyahu, his top officials and the Bank of Israel.
The Israeli banking sector, which opposes the reforms, is running a robust PR campaign, lobbying Israeli cabinet ministers, members of parliament and public opinion. Banks have spent millions of dollars on a cross-media publicity campaign and have hired a well-known US economist to fight the proposals.
A team of officials from the Finance Ministry and the Bank of Israel, headed by the ministry’s director-general, Joseph Bachar, has submitted its recommendations for the reform of the banking sector. They propose that the banks should be required to sell off their management companies, which run provident and mutual funds, within three years. By way of compensation, the banks would be allowed to sell insurance policies in their branches.
In a letter accompanying the report, the committee wrote: “Israel’s capital market is characterised by intense concentration and structural conflicts of interest in the operations of the financial mediators. The combination of these characteristics suffices to gravely impair the functioning of the Israeli capital market and to curtail its development.”
The committee has set out proposals to increase diversification in the capital market and end the conflicts of interest within the sector. It has taken the view that ultimately, a more competitive capital market will operate in the public interest. It has emphasised the need to increase competition by having new players in the financial sector to run the provident and mutual funds.
The Bachar committee recommendations stem from the banking share manipulation scandal of 1983, which forced the government to bail out the leading Israeli banks to the tune of $7bn. The banks were subsequently nationalised. In recent years, a process of privatisation has taken place. At the time of the scandal, a state enquiry commission recommended banking sector structural reform, and the Bachar committee was assigned the task of scoping that reform.
With Bank Leumi chairman Eitan Raff to the fore, Israel’s banking sector is up in arms at the recommendations and is lobbying furiously against them. The bankers are meeting Prime Minister Ariel Sharon and other leading politicians in a bid to convince them not to support the reforms. They caution that the reforms could have a disastrous effect on the banking sector.
Israel’s Association of Banks has invited the Promontory Group of well-known US economists to lobby against the reforms. After meeting the group, Netanyahu declared himself unimpressed by their arguments.
“I agreed to meet with you, but don’t expect me to be swayed. The Bachar committee has analysed several models in depth. To our best knowledge, the one chosen will have optimal results,” he said.
