It is quite surprising that the social protest ignored the banks, at least for now. Even the Trajtenberg committee avoided dealing with the banks, devoting fewer than 200 words to the subject: "There are indications that the banks charge households a higher price than the competitive price," it states, but fails to offer any operative recommendations, except to suggest to set up a committee to offer solutions "to improve the bargaining power of customers in the household and small business sectors." The committee should submit its proposals to the Bank of Israel and Minister of Finance within 120 days of being established.
Until such a committee is established, if it ever is, "Globes" has picked up the gauntlet. Beginning today, the paper will present the banking systems' concealed fat reserves - the places where it charges customers prices that are far above the "competitive price", as Manuel Trajtenberg called it. "Globes" will show the differential paid by the small customer, disclose the lack of competition between the banks and the damage that this market failure causes household. "Globes" will also present practical proposals to remedy the situation.
Customers pay the banks nearly NIS 4 billion on the extra interest margin between the interest rate on deposits and the interest rate on loans. This figure amounts to 18% of the banks' aggregate income from the retail banking segment.
Were the banks to pay households the interest rate it pays on deposits by the business sector, the banks' aggregate income would fall by NIS 2.3 billion - money that would go straight to customers.
This is a theoretical assumption, because large companies' deposits are several times larger than deposits by individuals, but is the huge differential justified? Assuming that the differential is narrowed by a third, interest income accruing to households would increase by NIS 780 million.
The big money is in the credit spread. The average credit spread in the retail banking sector is 4.31%, compared with 1.99% in the business sector. Were the banks to charge less risky households the interest rates they charge business customers, households' interest payments would shrink by NIS 3.13 billion. In other words, the extra amount that the banks charge households is NIS 3.9 billion a year - a fifth of the annual payments that the banks collect from households. As the Trajtenberg committee says, "the higher price compared with the competitive price" is nearly NIS 4 billion a year.
The question arises why the banks have no problem in collecting an additional NIS 4 billion a year from households and the retail banking sector. There is a one word answer: competition.
For the sake of comparison, in the highly competitive mortgage segment, the average credit spread is 0.7%. In retail banking, households have no bargaining power, and sometimes are not even aware that they can bargain on interest rates. In effect, households are beholden to the bank and pay whatever it demands. Competition between banks for retail customers amounts to limited-time benefits on fees and grants for opening new accounts. No one talks about the financial spread.
In contrast, business customers have alternatives, because the banks seek out these customers. As a top banker put it, in the business sector the banks "happily cut each other's throats". To extend hundreds of millions of shekels in credit to business customers, the banks are willing to slash their credit margins as much as necessary, sometimes to a level that does not reflect the risk of the deal. This was how Ilan Ben-Dov obtained billions of shekels in credit to make his heavily leveraged and risky acquisition of mobile carrier Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) at a lower interest rate than an ordinary citizen pays on his overdraft of a few thousands of shekels.
Solutions for narrowing the margin
Below are some suggestions for households and the regulator to narrow the financial margin.
For households:
- First, understand how much you are paying. Check the interest rate paid on savings and deposits and the interest rate on loans and credit frameworks.
- Bargain on the interest rate. It isn't easy, but it pays to try.
- Change the classification of your bank account. The banks give preferential rates to certain professionals or members of clubs.
- Work online. At all the banks, the interest on online transactions is better than the interest rate in the price list.
However, only regulatory intervention can reduce the surpluses that banks charge households for all types of credit.
- The Bank of Israel should require the banks to disclose in their financial reports the average interest rate charged households for all types of credit.
- The Bank of Israel should establish a financial margins comparison website, just as it set up a fees comparison website, to encourage customers to compare interest rates between banks.
- The Bank of Israel should require the banks to notify their customers once a year how much they pay in interest and the average interest rate charged, so that customers can see how the stand in comparison with their peers.
Although the Bank of Israel interest rate is the economy's interest rate, no ordinary citizen can borrow at this rate. For this purpose, the Bank of Israel interest rate is merely a number. The real interest rate which is the basis of the interest on deposits and loans is the prime rate - and the difference between the Bank of Israel interest rate and the prime rate is 1.5 percentage points.
This is where the Antitrust Authority should look. This 1.5% spread is at all the banks, and has been stable for years. That is how it is. There is apparently some natural law which stipulates that the banks' prime rate should be 1.5 percentage points higher than the Bank of Israel interest rate. That was the case when the Bank of Israel interest rate was 10% in 2000, and that is what is today, when the interest rate is 3%. But a decade ago, the financial margin was 15% of the Bank of Israel interest rate; today it is 50%.
What does this 1.5% margin represent? Minimum profit? Costs? Risks? Or maybe it is merely due to the fact that no one has every bothered to change it. Whatever the case, it raises some questions that the Antitrust Authority director general David Gilo ought to discuss:
Why has the financial margin between the Bank of Israel interest rate and the prime always been 1.5 percentage points, regardless of the huge changes in the Israeli economy? - How is it that, without any collusion naturally, all the banks always charge the same margin?
Published by Globes [online], Israel business news - www.globes-online.com - on October 24, 2011
© Copyright of Globes Publisher Itonut (1983) Ltd. 2011