In a closed meeting on Tuesday, the Knesset Finance Committee
accepted the compromises worked out in the original Bachar
Committee reforms of the capital market. The final committee vote took
place Tuesday evening. Although the details that are being
argued about seem technical and abstruse, they affect the
disposition of billions of shekels, and most economists agree
that they are a very important step for the Israeli economy
as a whole.
The purpose of the reform is to modernize Israel's financial
markets by diffusing financial resources in order to allow
more competition. Up until now too many of Israel's financial
resources have been concentrated in the major commercial
banks so that there were not enough independent centers of
financial power.
The bill is expected to then be brought to the Knesset plenum for its
final readings next week, with the goal of enacting it before
the Knesset recesses for the summer.
The key to the bill's passage is the support of the ruling
Likud Party which has seven MKs on the 19-member Knesset
Finance Committee. As things worked out, those MKs are mostly
opponents of the Disengagement and if Sharon had been the
main force behind the reforms they would probably not pass.
Instead, Finance Minister Benjamin Netanyahu is behind the
reforms and he is on good terms with the Disengagement
opponents. For many of them, he is their only hope of a long-
term future in politics if the Disengagement goes through. So
the can work together.
Every paragraph of the reform involves tremendous economic
interests both of those within the banks and those without.
For example, one provision of the reform allows banks to sell
insurance. The details of this are of importance to the
banks, but they also affect the insurance companies and the
insurance brokers who have been the exclusive sellers of
insurance up until now.
Finance Minister Netanyahu met twice with these MKs on Monday
to secure their backing. After being convinced that there was
no majority for the bill in its original form, he agreed to
the following changes:
* The bill's central provision, that the banks divest
themselves completely of their mutual and provident funds,
will remain intact. However the original bill required all
banks to sell their provident funds (kupot gemel)
within three years and their mutual funds (kranot
ne'emanot) within four. In the revised bill, this will
apply only for the two largest banks, Hapoalim and Leumi. The
smaller banks will be given six years to sell their provident
funds and eight to sell their mutual funds. Netanyahu had
wanted a maximum of seven, but he agreed to the extra
year.
* Banks will be allowed to collect marketing fees from the
pension and provident funds that they market to customers.
The original bill allowed them to collect fees only from the
customers and not from the funds they sell, for fear that the
advice they give clients might be influenced by which funds
offer the highest fees. This is a major victory for the banks
and will increase their revenues by hundreds of millions of
shekels a year.
* Banks that advise customers on pension insurance will be
able to collect fees only from the customer, not from the
insurance company. That is a major victory for the
independent insurance agents, since collecting fees from the
customer brings in much less money, and therefore makes it
less worthwhile for the banks to enter this market, which has
been up until now the exclusive domain of the agents. Last
week, under pressure from the agents — several of whom
are members of the Likud Central Committee — the
Finance Committee decided not to allow the banks to sell
pension insurance. But it reversed itself under pressure from
Netanyahu, who argued that it is necessary to compensate the
banks for the loss of their mutual and provident funds.
* The banks will be able to start selling pension insurance
as soon as they divest themselves of their funds, provided
they own no more than 10 percent of any insurance company.
* The two large banks will be able to start selling life
insurance four years after they divest themselves of their
funds. The smaller banks will be able to enter this market
the moment the first large bank does so, even if they have
not finished divesting themselves of their funds.
The Likud MKs also initially demanded that Netanyahu detail
the size of the marketing fees the banks would be allowed to
collect from mutual and provident funds before the bill's
final readings in the plenum. However, they eventually
accepted his position: that the fees will be set later in
treasury regulations, which by law must be submitted to the
committee for approval. Netanyahu agreed to submit the
regulations for approval within a week.
Despite the fact that some of the changes agreed to by
Netanyahu and the Likud MKs were in response to the bankers'
demands, the major banks were not happy with the final
package.
"The banking reform has been liquidated before it was even
born," declared Bank Hapoalim CEO Zvi Ziv, referring
specifically to the ban on banks collecting fees from
insurance firms and the proviso that they may enter the life
insurance market only four years after they sell their mutual
and provident funds. "Those who wanted to prevent free
competition in the insurance market got their wish. This
agreement distances us from capital market reform.
"I don't understand why the banks' entry into the insurance
market, which the Bachar Committee viewed as an important
element of the reform, has been deferred for so long," he
continued. "Nor can there be any justification for preventing
the banks from receiving marketing fees from the insurance
issuers ... Nothing will cause a customer who wants to buy
insurance to pay for what he has hitherto received for free.
Thus, in this situation, it is clear that the banks will not
enter the insurance market and the goal of reforming this
market will not be achieved."
Most independent economists were very strongly in favor of
the reforms. American Nobel Prize winner Milton Friedman sent
a letter this week in support of the reforms.
The hope and expectation is that after the reform Israel will
develop a number of different financial institutions such as
investment banks, large fund managers, brokerage houses, and
others, like there are in other modern economies. In Israel,
the major commercial banks have dominated the financial
scene.
Professor Marshall Sarnat, president of the Israeli Academy
of Management Science, Social Science and the Humanities,
explained that separating the banks from the capital markets
is not intended to punish the banks in any way, but to create
an efficient financial system capable of promoting
sustainable economic growth. Removing the banks from control
of the capital markets (except for marketing and distributing
financial products) is necessary to fundamentally reform the
financial system and to create free and competitive capital
markets.
Up to know the banks effectively controlled all of the
capital in the Israeli financial system. Breaking the banks'
monopoly of the capital markets should allow new financial
institutions, both foreign and domestic, to enter these
markets. This will allow Israel to develop a nonbank sector
of investment banks and other financial institutions
alongside commercial banks, which in turn, will increase the
market's competitiveness and efficiency in allocating
resources, and help the Israeli economy integrate into the
global one.
