Last Tuesday the Tel Aviv Stock Exchange (TASE) Insurance Index rose 2.5%, well above the modest market gains. The reason for the jump in share prices was the Supervisor of Banks Daniel Hahiashvili's recommendation in an interim report by a team which he heads that bank licenses be awarded to non-bank financing enterprises including credit card companies.
Bank of Israel want to increase competition
The aim of the move is to increase competition in the banking system by those non-bank entities that would be able to raise deposits from the public and provide them with credit. The significance of the implementation of the recommendations means that the insurance companies, which are already a dominant factor in the management of the public's pension and provident funds, and are eyeing the purchase of the credit card companies (which were also "forced" out of the hands of the banks) will now be able to use those companies to apply and obtain a banking license as well.
The report published by the Supervisor of Banks, which bore the dull name "Interim report of the team for examining an outline for granting a bank license to non-banking entities," includes a series of major recommendations. The public would be able to make a deposit in Isracard or another bank, and they would compete in the interest rates they offer. On the other hand, more entities will enter to provide consumer credit, with the aim of make loans cheaper for the public.
To make it easier for the new entities to become banks, it is proposed to divide the types of banks in Israel into two categories, a "supervisory level 1 bank" which has assets of up to NIS 50 billion (all credit card companies, and the other players in non-bank credit are included in this category), and "Supervisory level 2 bank", which has assets that exceed the amount in question, referring mainly to the five big banks. The latter would receive stricter supervision, and the former – the small ones, would receive easements in supervision to encourage their activity. Among the reliefs for the small banks would be, for example, an exemption from the need to offer the full range of services to which banks in Israel are obligated, such as receiving a deposit in foreign currency, opening a checking account, check services and more.
Not only credit card companies
The Supervisor of Banks and his team clearly hinted that they meant that the credit card companies could request a banking license to become small banks.
Today there is only one credit company in Israel owned by an insurance company – Max, which was acquired by Clal Insurance. But currently Menora Mivtachim is bidding to buy control of Isracard, while Israel Credit Cards CAL is still owned by Israel Discount Bank and First International Bank.
Moreover, the Supervisor of Banks is aiming beyond the insurance companies to other non-banking companies that already provide credit like Gamma Management and Clearing, which is already owned by The Phoenix Holdings.
Thus the supervisor of the banks is signaling the entry of insurance companies into the competition for the provision of credit. But this will increase their power, which is also very great.
In this context, it is worth revisiting the recommendations aimed at reducing the power of the banks in Israel. The Bacher Committee set up 20 years ago when Benjamin Netanyahu served as finance minister, forced the banks to sell the trust funds and provident funds that they owned, with their billions of shekels in the public's savings in pensions and other funds, and which were later purchased by the insurance companies and large investment houses. The Strum Committee which was established by Minister of Finance Moshe Kahlon in 2015, with the aim of taking assets out of the hands of the banks, this time targeted the credit card companies. The natural candidates for acquiring those companies were the large insurance groups. After Max was taken over by Clal Insurance, the two other insurance companies (Menorah Mivacthim and Wesure Global) are currently competing for the acquisition of control of Isracard.
Will the insurance companies become banks?
So if the insurance companies do become banks through their ownership of credit card companies, they will continue to gradually receive more and more money and financial assets beyond their original purpose, which was the sale of insurance policies. The next step as mentioned is accepting deposits and providing credit to the public through a license to operate as a bank.
How much the Bank of Israel wants the insurance companies to become banks can be learned from another recommendation that emerges from the report. The Supervisor of Banks recommends that "the holding companies that control institutional entities can at the same time control a small bank." Although the Bank of Israel admits that this recommendation requires a broad public discussion before it is implemented as an amendment to the legislation, the spirit of the matter is clear.
And on the way to this goal there is a carrot that is being waved on salaries of senior executives in finance, which currently limits the salary of senior executives of banks and insurance companies. In order for the new bodies to become banks, the Bank of Israel proposes that in the five years following implementation of the recommendations, the restrictions of the Executive Salary Law will not apply to them. There is an incentive here for the executives themselves to implement the plan (and perhaps even to entice bank managers who would like to participate in establishing a bank and receive a much higher remuneration than they can today).
It is possible that the result of all this will be that the competition in the banks will indeed increase, and we will be able to deposit money with Isracard, or take a loan at an attractive interest rate from Phoenix's Gamma, so that the goal will be achieved. But if the insurance groups become too large and powerful, it is not impossible that a new concentration problem will arise in the financial system.
Published by Globes, Israel business news – en.globes.co.il – on October 21, 2024.
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