Little economic impact seen from new overdraft rules

Economists and analysts alike agree that implementation of the new overdraft directive will have little, if any, impact on consumer spending and economic growth.

July 3, 2006 09:09
1 minute read.
bank pix feat 88 298

bank pix feat 88 298. (photo credit: Courtesy Photo)


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Economists and analysts alike agree that implementation of the new overdraft directive will have little, if any, impact on consumer spending and economic growth. "The overdraft reform will have a psychological effect, but there is no practical effect on economic growth or consumer spending," said Dr. Roby Nathanson, director of the Israeli Institute of Economic and Social Research. "As only small businesses will be marginally affected by the directive, while large companies will go unstained." Against the angst that has been building up in the public in past months, economists were in agreement that the overdraft directive, which came into effect on July 1, actually would reduce the risk in the banking system, help the citizen and force businesses to invest in better financial management. "In the short-term that is over the next six months, more checks will bounce back and some 2,000 to 3,000 small businesses will be at risk of closure," said BDI joint managing director Eyal Yanai. "But the impact on the country's macroeconomic situation will be minor." "Small businesses which now might face financial hardship or closure were probably already in difficulty," said Prof. Ben-Zion Zilberfarb, professor of economics, and chairman of the A. Meir Center for Banking at Bar-Ilan University. Shlomo Maoz, chief economist at Excellence Nessuah, meanwhile, said that although in a few months time a minor cut in consumer spending might be seen, in the long-term implementation of the directive was likely to boost economic growth and lead to better management of small businesses. "Nothing has changed, the total amount of credit need not change." said Vered Dar, chief economist at Psagot Ofek. "The Bank of Israel did not order the banks to reduce credit to their customers but just to set the level in a different manner, that is in an organized manner by agreement and within a framework." Dar added that whereas before bank customers could have almost any amount in credit but did not know what interest rate the bank would charge, the banks now must warn and agree with the customer on appropriate credit frameworks and interest rates as well as other charges. "In the long-term the new overdraft rules will be better for low income groups who until now have had to pay high interest rated to manage their finances," said Nathanson. "With this directive, we are now joining the club of developed countries."

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