A balance of power

money 88 (photo credit: )
money 88
(photo credit: )
Overdrafts are another way for banks to extend additional credit to their clients so they can consume more and pay more interest. Both sides benefit from this deal, in a way. The problem is that these arrangements are made in a way that fails to keep the the bank's customer fully informed. Usually, people are not aware of how much interest they're paying and the banks encourage them to use more of their overdraft. It is purely a question of balance of power, and it is clear who has the upper hand. The new overdraft law that took effect on July 1, 2006, which prohibits exceeding credit limits, serves the banks more than it does the public. As a consequence, the banks raised those limits. They charge permanent interest on these expanded limits and they charge another NIS 25 just for signing up. The banks passed this law. People should check how much interest they receive from their bank on their savings and trusts, and if it is less than the interest they pay on their overdraft, it is a bad deal. The common assumption that Israelis tend to live beyond their means is fundamentally wrong. The American banking system, for instance, doesn't approve overdrafts for historical reasons, and not because they are unprofitable. The US is a big country and it is hard to force clients to repay their overdraft when they can move from state to state. Israel, however, is a small country with a limited number of banks and people will have to pay their debts eventually, with interest. The state insures the banking system and it's in the state's interest to prevent banks from going under. This is why we don't have foreign banks in Israel or real differences between the banks. It's a noncompetitive market and no foreign bank can get the governmental assistance the Israeli banks get. Prof. Joseph Zeira teaches at the Hebrew University's Department of Economics.