Last Thursday evening, it was critical to the Ministry of Finance, extremely critical, to announce to the nation that Finance Minister Yair Lapid met with an impressive group of executives and directors of the big banks, and told them as follows: “Bank fees are too high and not transparent enough. We must take action to reduce them.” The press release was very short. It listed who was present at the meeting and what the general agenda was, and, of course, it included Lapid’s emphatic declarations: reduce fees, they are not transparent, help small- and medium-sized businesses, we must encourage competition and innovation in the banking industry. All the clichés and catch-phrases associated with the banking sector were crammed into one single press release. In one single press release, Lapid positioned himself, or at least tried to, as someone who protects us from the banks’ excessive fees, and as one who works for the consumer, and is not afraid to speak out against a group of some of the strongest people in the economy.
Not everyone described the meeting in the same terms: “There was an agreement, not in writing, but an oral agreement, that the content of the meeting would remain private and would not be leaked to the press. But shortly after the meeting ended, Lapid’s spokeswoman rushed to issue a statement to the press that the meeting was about bank fees.
“The feeling was that the meeting had just one objective: for Lapid to be able to issue a statement afterwards in which he is portrayed as a defender of the public, as someone who demands that fees should be lowered, as though that is the biggest and most important problem with the economy, and with banks specifically.
“In the meeting, Lapid was presented with data that indicated that fees are not high, relative to the rest of the world. Lapid did not try to face the issues with the data, instead he responded: ‘If people say so often that commissions are high, they must be.'
“Lapid was also presented with negative forecasts for the markets, and the banks complained about the stigmatization of the business sector that scares business people away. It didn’t really develop into a meaningful discussion. Lapid was marginally interested only when they spoke a little about housing prices.
“In similar meetings, with previous finance ministers, a somewhat broader discussion took place. The banks, despite the natural and sometimes warranted gripes against them, are an economic barometer. They have their fingers on the pulse, and they have a picture of what lies ahead. They control the flow of credit, and they know if credit is widening or narrowing. They also know about future investments. They are in close contact with companies and they are able to observe when their situation worsens. Lapid did not take advantage of the opportunity to learn, or to look a step or two ahead. The only thing he was interested in at the meeting was issuing his declaration about the high fees and the need to reduce them, so that his spokeswoman would be able to quote him in the press release.”
The banks, of course, are far from perfect, but the preoccupation with fees is absurd and irrelevant. It’s small change, so small that there is no point in dealing with it. Israeli households spend an average of NIS 15 per month on fees, close to NIS 200 annually. There are a thousand and one issues that need addressing in the Israeli economy, and bank fees are not one of them. One phone call to Supervisor of Banks David Zaken would reveal the true picture to Lapid: a comparison conducted by the Banking Supervision Department through a third-party consulting firm found that Israel is ranked among the countries with the lowest bank fees. The banks did not make this comparison, their regulator did. Does the regulator serve the banks? Not exactly, and certainly not with regards to the fees that have caused such an overblown hubbub in recent years.
If Lapid wants to attack the banks and their regulator, he should focus on something else entirely - on the banks’ financial spread. The same spread that we have written about again and again over recent years. We will gladly mention it again: the banks’ big money, the money that is siphoned from consumers, especially the weaker ones, comes from the interest that is charged on their overdrafts and on the loans they take from the banks. This is not a matter of NIS 20-30 a month, rather hundreds, or thousands, a month, depending on the size of the loan.
What is the classic bank activity that squeezes billions from the public? It is brokering money. The bank is a kind of a broker - it takes money from John Doe and gives it to Jane Doe. Private sector loans are generally taken by households - that famous overdraft, along with various other loans. The bank pays relatively low interest on deposits, and charges relatively high interest on loans - from interest on standard loans, to interest on overdraft, and on up to interest on balances that exceed credit limits. The difference between these interest rates is the financial spread, the cherry on top of the banks’ profits. In the household sector, this spread is two to three times what it is in the business sector (5% as opposed to 2% - as the basic rate of interest drops, so does the spread).
Simply put, banks pay households very low interest on deposits (dependent, of course, on prime rates), but they charge very high interest on loans. The business sector has much higher interest rates on deposits (because of their size) and pays much lower interest on its loans. Amazingly, household credit is much more secure than the business sector’s, and much less risky. It is spread among millions of borrowers, and is backed by collateral that can be easily seized and realized. Despite all this, households pay exploitative interest rates. Credit in the public sector is much more concentrated, and is often backed by collateral that is not really ideal or solid. The bottom line is that the excessive interest collection from households amounts to billions of shekels each year, but what bothers Lapid and a few other Knesset members is some fee or other that could save a few shekels a month.
How do we solve this? All the brainiacs will rush to answer: competition, competition, competition. This is true, but competition in the banking sector will not come about on its own, and it is really nothing like mobile telephony, for example. Foreign banks are not lining up, and they won’t in the future either, because Israel is a tiny market to them. Competition among the existing banks? Forget it, it only marginally exists. The social bank? It will be a long time before that happens. What yes? Only more intensive regulation, to limit the spread (which is also quite complicated). But forget about this as well, because the Supervisor of Banks will not dare to destabilize the banks, and limiting the spread would cut into the banks’ profits and would destabilize them. That’s the reality, and it is pretty discouraging. We have to say it loud and clear, and not throw slogans around.
Published by Globes [online], Israel business news - www.globes-online.com - on November 21, 2013
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