War between a regulator and a regulated body is bad and unnecessary. The current war between the Bank of Israel and Bank Hapoalim (LSE: BKHD; TASE: POLI) is bad for everybody. It's bad for the Bank of Israel, bad for Bank Hapoalim, and it's especially bad for the banking system. The most precious asset of Israel's banks is public confidence. Confidence is elusive and unquantifiable, but its disappearance will lead to disaster, for confidence is what stands between a stable banking system and a run on the bank.
The latest exchange of blows between the Bank of Israel and Bank Hapoalim, the near-public statement by the Bank of Israel that is has no confidence in Hapoalim owner Shari Arison and in the appointments she has made, and that it has no confidence in the bank's chairman Dan Dankner and is not satisfied with his conduct all these things do not contribute, to say the least, to public confidence in Bank Hapoalim, and reflect on the Bank of Israel's perception of the rest of the banking system.
Damaged stability
It is almost superfluous to comment on the huge damage that the clash with Supervisor of Banks Rony Hizkiyahu and Governor of the Bank of Israel Stanley Fischer has occasioned Bank Hapoalim. It could be that the Bank of Israel reached the conclusion that it was necessary to call Arison to order, but a public rebuke is a somewhat problematic way of conveying the message. Fischer's pep talk with Arison, his undisguised view that Zion Keinan is not fit for the post of CEO, and his claim that Dan Dankner is not functioning as he should, severely damage the bank's image and undermine its stability. The investors in Bank Hapoalim, most of the foreign, hear and see what is going on, as do the customers, and of course the bank's workers. Perceptions are highly adverse, and the rumors about what's happening at the bank keep growing. What have we not heard in the past 48 hours? Erez Vigodman is to be appointed CEO, Dan Dankner is resigning, Dan Dankner has been fired, the state will nationalize the bank and these are just samples. The Bank of Israel pays tribute to the stability of the banks, but events like these don't exactly contribute to it.
The regulator as a paper tiger
Nor does the Bank of Israel come out of the affair looking good. Fischer, a man of stature, the guru of the Israeli economy, who remains above the everyday petty squabbles, has tuned himself into a kindergarten teacher telling off the children. Hizkiyahu, a modest person, professional and straight, certainly the best Supervisor of Banks we have had since the 1980s, has got into what is seen as a personal battle with the chairman of a large bank. All this is happening against the background of an unpleasant State Comptroller's report that points to weakness in the regulation of Bank Hapoalim in the mortgage backed securities affair.
Beyond that, the Bank of Israel's authority is being eroded. When a regulator makes a suggestion to or a request of a body under its supervision, that body must treat it as an instruction to act immediately. Not as a recommendation. A central bank must not lose its deterrent power and be perceived as a paper tiger. If, in the end, Keinan is appointed CEO, what will all the fuss have been about? And if Dankner is considered unfit but the controlling shareholder backs him and he stays in his post, what then? Furthermore, the Bank of Israel criticized Shari Arison for the appointment of Iris Dror as a director. There is no disputing the fact that neither Dror's education nor her experience are typical of a Bank Hapoalim director. To complain to Arison that she sought a problematic appointment is fine, but someone approved Dror's membership of that august body, and that someone is called Rony Hizkiyahu.
What public backing means
"It is not healthy for a regulated entity to get into a dispute with the regulator, because in the end the regulator always wins," a very experienced banker told me recently. The public backing that Arison gave Dankner yesterday is a poke in the eye for the Bank of Israel. "You're telling me that in your opinion he isn't functioning, I tell you that as far as I'm concerned he's doing fine," is how Arison defies Fischer and Hizkiyahu. What good did the childish act of public backing do? Was it meant to annoy the Bank of Israel even ore, or was it just to have the last word?
In any case, public backing only weakens Dankner, and whoever advised Arison to give it seems not to have understood its consequences. Any soccer fan recognizes the phenomenon. The team loses week after week, it's stuck at the bottom of the league table, the end is nigh, pressure grows, and the fans muse out loud about the profession of the coach's mother. Then the strongman on the team's board of directors comes out and announces gaily and publicly that he has one hundred percent faith in the coach and has no intention of dismissing him. From that moment, the countdown begins. An hour after the next defeat, the coach is booted out.
A manager whose standing is strong and stable has no need of announcements of support from anyone. A declaration of support that is equivalent to a statement that there is no intention of dismissing an office holder is almost worse than an announcement that a replacement is being sought. The last person to receive such backing at Bank Hapoalim was Zvi Ziv. That was last August. The rest is history.
Getting at Arison?
There is something in Shari Arison's sense that she comes under closer scrutiny by the Bank of Israel than happens at other banks. Zadik Bino was not required to appoint a search committee to decide on David Granot's replacement as CEO of First International Bank. When Bino decided the time had come, he simply appointed to the post the head of the Corporate Division, and someone close to him, namely Smadar Barber-Tzadik.
Another example is Arison's shadowy advisor, Adv. Pini Rubin. The Bank of Israel is concerned at the fact that the real decisions at Bank Hapoalim are not made by the board but in Shari Arison's Byzantine court. There, the most influential person is Rubin, someone who has no official position and owes no fiduciary duty to the bank, an advisor to Arison but also to many other entities, some of them among the bank's largest borrowers.
As far as the bank of Israel is concerned, there's a problem here. A person who is not subject to any restriction and not under its supervision is the person whose view counts more than anyone else's. But Bank Leumi has a similar figure who is highly influential in the way it is run: Adv. Dalia Tal, the board's legal counsel and a close personal friend of CEO Galia Maor. For some reason, that doesn't bother anybody.
Published by Globes [online], Israel business news - www.globes.co.il - on April 22, 2009
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