(photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
The International Monetary Fund issued an unusual rebuke this week of the Strum Committee, a joint committee that set out policy recommendations for increasing competition in Israel’s financial system.
The committee, which issued its final report in June, set out plans to spin off the country’s two largest credit cards from its two biggest banks. The final recommendations were the result of a compromise between Finance Minister Moshe Kahlon, who had made financial reforms a central promise in his election campaign, and Bank of Israel Gov. Karnit Flug.
But the IMF report on Wednesday raised flags about political pressure on the bank and the use of outdated data.
“The mission was conducted against the backdrop of considerable political pressure on the BSD [Banking Supervision Department] in the discharge of its prudential responsibilities,” the IMF wrote.
Yet some of the more worrisome concerns the IMF raised have already been addressed.
The IMF mission to Israel upon which the report was based took place in April, and focused on the controversial interim report from the committee.
For example, the IMF fretted that spinning off Israel’s third-largest credit card company could “lead to higher retail interest rates and fees” and eventually “generate a ‘race to the bottom’ form of competition through lower lending standards.”
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The final Strum report, however, only recommended spinning off the two largest credit card companies.
Banks, however, who stand to lose substantial business and face tougher competition if the recommendations go through, saw the report as a vindication.
“They’re criticizing the government in a very extreme way,” said one senior bank official who asked to remain anonymous.
Among their concerns was the Strum committee’s use of old data. More recent data, the IMF noted, “are providing a clearer and somewhat different picture of competition in the retail credit market in Israel than that presented in the Interim Report.”
The more recent data, detailed in the Bank of Israel’s own 2015 Annual Report, showed that credit card interest rates in Israel are actually lower than most OECD countries, and credit has become more readily available. Those issues, the banker noted, are central rationales for splitting off the credit cards in the first place.
“When we reported this to the Strum committee, they said we had a conflict of interests, but now it’s more difficult for them to explain,” the official said.
Still, even before the IMF report, the Bank of Israel had acknowledged the new data and argued that the reforms would still help consumers and businesses gain better access to credit. Further, the reform is intended to create competition in banking, not just credit cards.
Though the IMF report was unusual in its critique, it was not the first time it has clashed with Israeli economic institutions.
Last June, it issued a report critiquing the Bank of Israel’s approach to deficit maintenance, arguing for a more stringent adherence to deficit rules.
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