With the unveiling of the much lauded reform in the fees and commissions charged by the banks it is becoming evident that the banks, with their powerful lobbyists and guardians in the bureaucracy, have managed once again to sidetrack essential reforms by offering insignificant concessions. As Zvi Lavi of Ynet has pointed out, instead of focusing efforts on completing the reform in the still concentrated banking sector; instead of making the very wasteful management of the banks efficient - the highly touted Knesset reform merely consolidated 198 confusing fees to "only" 72, lowering the cost of very few. The reduction is in marginal fees, while the basic fees paid by households and small businesses are going to rise considerably and so will the interest spreads charged on loans. Some reform. A sensational expose in Yediot Aharonot's June 27 Friday magazine charged the banks with fixing the price of their fees, thus extorting from their customers billions of shekels in excessive fees. Excessive fees, however, serious as they may be, are not the root cause of the banks' troubles. They tell only one-third of the story. THE DIRECT costs of running the banks are a staggering NIS 25 billion a year. These costs are covered by NIS 14b. earned from the inflated fees, about a third of the banks' profits. The banks make an additional NIS 22b. in interest margins by paying savers less than market interest on their savings and by charging usurious interest to families and small businesses on overdrafts and loans. Surprisingly, this enormous interest income was totally ignored by the Knesset. The low interest the bank duopoly has been paying savers resulted in a huge transfer of wealth from middle-class savers to the few families controlling the banking sector. The banks employ 40,000 workers at an annual cost of NIS 15b. Average cost per employ is NIS 350,000, three times the NIS 100,000 cost of other workers. These outrageous salaries were extracted by the bank workers union with the help of the Histadrut and other monopoly unions when the banks were nationalized. The banks' managements cooperated because keeping the workers happy enabled them to take huge salaries and perks for themselves. The banks have a thousand branches and costly, fragmented information systems that require thousands of maintenance workers. These branches and information systems cost NIS 10b. a year. The banks have to make around 12% return on their capital of about NIS 60b. - an additional NIS 7b. They pay about NIS 4b. in income tax. In total the banks have to make at least NIS 36b. to cover costs. They simply cannot make such profits without overcharging, a fact overlooked by the Knesset. The bankers and their lobbyists and PR agents managed to focus the public debate and the Knesset's attention on only a small part of the problem, the excessive costs of some fees and commissions. Even in regard to the fees and commissions attention was focused on the fees for managing a bank account. These fees provide the banks only 3%-4% of their income, but they distracted attention from the much costlier fees and commissions and from the exorbitant interest the banks charge on loans and the low interest they pay, far more important issues. SOME KNESSET members believe that the solution to the banking scandal is to fix the cost of fees and commissions by law. Others believe that only more stringent regulation can avert price fixing. These are false hopes. The country already has the most extensive and stringent banking regulations imaginable. They are mostly unenforceable because the regulators lack determination and are politically too weak, while the banks are politically powerful. The banks employ lobbyists who have great influence on Knesset members dependent on bank loans to finance their primaries. They employ the best lawyers and accountants and many academic "consultants" willing to make their case. Still, the Knesset can help by providing regulators with the effective law helping enforce anti-trust regulations as proposed by Ronit Kan, head of the Anti-Trust Commission. A basic problem of banking regulation is that the body overseeing bank activity, the Bank of Israel's comptroller of the banks, defines its mission as the preservation of bank stability. To achieve this admittedly important goal, the comptroller has ignored many of the banks' offenses. Hoping to protect short-term stability by safeguarding bank profitability even when it has involved anti-competitive practices and worse, the comptroller did not prevent the banks from following, several times, policies that brought them, and the economy, to the verge of ruin. Only the bailout by the taxpayer, to the tune of many billions, saved the banks and the economy from the comptroller's lack of action. This is a pity. Many recent studies indicate that competitive and decentralized banking sector can secure long-term stability better than a centralized banking sector with excessive regulation. True, as we witness now in the US, spontaneous regulation by competitive markets cannot always protect them from all government-created distortions and from human foibles. No system can be perfect, so in rare cases emergency intervention is justified. Over the long run, however, markets prove far better at assuring stability than excessive intervention as practiced here.