(photo credit: MARC ISRAEL SELLEM)
After months of infighting on a plan to introduce more competition to Israel’s financial system, Finance Minister Moshe Kahlon and Bank of Israel Governor Karnit Flug presented a compromise plan to the government on Monday that could see Israel’s bank-owned credit card companies turn into new banks in their own right.
“Today, I can announce that after 47 years in which a new bank hasn’t been founded in Israel, a path has been paved for building new banks,” Kahlon said.
In order to wrest the 70 percent market share monopolized by the three biggest banks, the reforms aim to reduce regulation and capital standards on new entrants to the field, making it easier to open new banks and compete with the existing ones.
Bank Hapoalim and Bank Leumi will spin off their credit card companies, though the next largest bank-owned credit card (co-owned by Israel Discount Bank and First International Bank of Israel) will remain untouched for four years, when the issue will be reassessed.
The newly independent credit card companies will have a basis on which to develop into deposit-holding banks, under BOI regulatory supervision.
Some large institutional investors, such as pension funds, will also be able to issue consumer credit for the first time.
Within four years, other commercial entities will be able to enter the banking market under eased conditions, requiring NIS 50 million in initial capital instead of NIS 400 million, and with lowered capital adequacy requirements in their early years. Credit unions will see an easing of their preliminary regulatory and capital requirements.
“Competition in the banking sector will ease the credit situation for small and medium business,” Prime Minister Benjamin Netanyahu said at Monday’s cabinet meeting, “and separation between the major banks and credit card companies is the start of a comprehensive reform that will be good for all Israelis.”
The proposals still have to pass the standard legislative process in the coming weeks.
For Kahlon, who centered his electoral campaign on battling monopolies and market concentration, the plan represents the fulfillment of one of his central campaign promises.
Last summer, he and Flug announced the creation of a committee under the leadership of former antitrust commissioner Dror Shtrum to set out a plan.
But after the Shtrum committee released its interim recommendations in December, Kahlon and Flug had battled over some specifics.
Kahlon said he might abandon the recommendations altogether, arguing they did not go far enough to ensure competition, but Flug warned that further action might introduce financial instability into Israel’s banking system. At Flug’s insistence, oversight authority over the credit card companies will remain under the Bank of Israel’s purview in the final reforms.
“The agreement that will leave supervision of the credit card companies at the Bank of Israel is of the utmost importance, in order to avoid a situation in which a regulatory gap will open up between the credit banks and the credit card companies,” Flug said Monday.
Without such supervisions, she said, financial risks could creep into the system, which could result in a financial crisis.
Flug also emphasized the importance of regulatory work the Bank of Israel is undertaking to introduce technology and transparency to the sector.