"The cartel structure of Israeli banking and the lack of competition are sources of many failures," opens the summary of a study to be presented at a Knesset Economics Committee hearing on how the lack of competition in banking harms Israeli consumers.
"Lack of Competition in the Banking Sector in Israel: Primary Shortcomings and Recommended Improvements" found that the proportion of Israeli banks' revenue from fees is the highest in the world, and that there is a "surprising convergence" of fees, distorted credit allocations, and more.
Prof. David Levhari and his assistant Shiran Rachmilevitch prepared the survey for the Institute for Economic and Social Policy at the Shalem Center. MK Gilad Erdan (Likud) called for a hearing of the Economic Committee, to be attended by the Bank of Israel Banking Supervision Department, Ministry of Finance, bank representatives, and consumer protection organizations.
6,242 customers per branch
The study found two paramount factors were the source of Israeli banks' inefficiency: government involvement, through its holdings in Bank Leumi (TASE:LUMI) and Israel Discount Bank (TASE:DSCT); and over-centralization. More than 94% of bank branches belong to Israel's five largest banks. The average number of customers per branch is 6,242 in Israel, compared with 2,857 in the G10 industrialized countries.
Levhari states: "The high figure in Israel is evidence of the lack of competition, and is an indication of the poor service Israeli customers are likely to receive, compared with service overseas… We cannot assume that this is a case of greater efficiency compared with other banking systems in the world."
The study states, "Credit policy is also distorted. 48% of loans granted in 2002 were larger than NIS 35 million, and the proportion has been steadily rising in recent years." and goes on to state, "The banks problematical situation is due to their incautious credit policies."
Disproportionate fees
The study found that the proportion of Israeli banks' revenue from fees is the highest in the world, completely out of proportion in comparison with other banks in the world. The aggregate operating income of Israel's five largest banks in 2002 was NIS 9.905 billion, of which 85%, or NIS 8.405 billion came from fees.
The proportion of operating revenue from fees at Deutsche Bank (NYSE:DB; LSE:DBK; XETRA; AEX: SWX; ATX:DBKG) is 13.3%; UBS (SWX:UBS) - 2%; JP Morgan Chase & Co. (NYSE:JPM), - 36.3%; and Barclays Bank (NYSE:BCS; LSE; XETRA:BARC) - 34.4%. The latter figures two include fees from non operating sources.
The study states, "Another indication of operating fees' heavy burden in Israel is the ratio between the operating fees and profit from financial mediation. In 2002, the five large banks reported an aggregate profit from financial mediation of NIS 17 billion, and NIS 10 billion after deducting the aggregate allowance for doubtful debts.
Aggregate revenue from operating fees was NIS 8.4 billion, accounted for 84% of the banks' aggregate profit from financial activities. This astonishing figure has no comparison at any large bank in the world. Bank of America's (NYSE:BAC) revenue from operating fees is less than half its profit, and UBS's is less than a tenth."
Profiting from the spread
Israel's financial spread is 2.3%, higher than in any other Western country. The spread in the US is 1.6%; in the UK, Netherlands and Australia - 1.5-2%; and in Germany and Switzerland - 0.8%.
Identical fees
The report states, "The Banking Supervision Department recently took a step toward competitiveness, when it ruled that as of 2004, the banks must publish their fee rates before carrying out a transaction. However, the necessary reform is still a long way off. Although the Banking Supervision Department recommends that consumers compare bank fees and conduct market surveys, the recommendation is not practical. How can a consumer compare a NIS 10 payment at Bank Hapoalim with a NIS 10 payment at Bank Leumi? It is the job of the Banking Supervision Department to supervise (the banks), not make recommendations (to consumers)."
The study points to the "surprising congruence" between the banks' fees. Bank fees in Israel are high and almost identical from one bank to the next. Moreover, there are over 200 different kinds of bank fees in Israel, some of which exist nowhere else. For the sake of comparison, the Bank of America exempts account-holders with a minimum balance of $5,000 from fees, and Citibank (NYSE:C) exempts account-holders with a minimum balance of $6,000.
The index of the average bank fees for 15 frequent services provided by Israel's five largest banks rose 3.1% in real terms between the first half of 1999 and the first half of 2003. During a period of recession in Israel and global slowdown, the burden on households in Israel from fees increased.
The report concludes, "Israel's banking system should be made more sophisticated and decentralized. The current situation, in which consumers are held captive by the banks and forced to pay excessive fees and high interest rates, must be abolished. The dynamics of the free market creates unparalleled benefits, at least in the financial sector. Healthy competition has the power to benefit consumers."
Published by Globes [online] - www.globes.co.il - on February 3, 2004