Even though Israeli banks have liquidated over half of their international activity in recent years, the Bank of Israel is not satisfied; it wants them to reduce it still further. The Bank of Israel Banking Supervision Department yesterday published a draft circular on supervision of overseas branches. The order requires the banks to tighten and reinforce the monitoring of their branches outside Israel.
"The Israeli banks have significantly reduced their overseas activity in recent years. As a complementary step to this reduction, we are demanding that the banks reconsider their remaining overseas business and restrict it to a small number of important countries and branches in a way that will facilitate an allocation of resources that is suitable in extent and quality for the sake of appropriate risk management," Supervisor of Banks Hedva Ber stated today.
Ber emphasized that overseas business incurs risk, as well reflected in the investigations by US authorities against Bank Leumi (TASE: LUMI), Bank Hapoalim (TASE: POLI), and Mizrahi Tefahot Bank (TASE:MZTF). These investigations have led to the imposing of heavy fines on the banks, and more fines may be in prospect. In the framework of the order, the banks will redefine the strategy for overseas activity and their risk appetite for it. Ber is not explicitly demanding that a specific bank shut down a specific activity, but she expects the banks to reach this conclusion by themselves, or alternatively to substantially bolster their risk management in some locations (this will have a negative impact on the profit from these activities, which is already regarded as low).
"The bank must decide in which countries it wants to operate, what activities will be carried out, and the minimum size of its branch that will facilitate proper risk management and meeting the local regulatory and legislative requirements. The bank will devise a plan for leaving places where its current activity does not fulfill the requirements," the instruction states.
Banking system sources say that the Bank of Israel's aim is mainly to reduce activity in emerging markets, where the risks are considered much higher. Over the years, the banks have eliminated a substantial proportion of their activity in these markets.
Banks that still have activity in emerging markets include Bank Hapoalim, with BankPozitif in Turkey, and Bank Leumi, with business in Romania. The two banks have not had much success with their business in these branches over the years. Bank Hapoalim and Bank Leumi would be only too happy to unload these activities, but the branches are difficult to sell. In the new order, the Bank of Israel is expected to step up the pressure to sell or close down these activities.
Bank Hapoalim has already begun reducing BankPozitif's activity, initially selling the branch's business in Kazakhstan. It also decided to cut back the credit portfolio in Turkey, and sold most of the bank's retail credit portfolio early this year.
The Bank of Israel is also forbidding the banks to use methods that previously helped customers to evade taxes imposed by the authorities, such as keeping numbered accounts and accounts under false names, the use of offshore companies, and back-to-back deals, in which credit is granted against a deposit. These methods were exposed as have been utilized to help the banks' customers to evade taxes, especially in the US. The banks are also being required to hire external auditors with local expertise to periodically audit risk management at their overseas branches.
The banks must also make a party at the Bank of Israel responsible for collecting information about the overseas branches. The party will receive a complete up-to-date picture of the state of the branches from the bank's board of directors and management.
The instructions are being issued despite the fact that all of the banks have cut back on their overseas business in recent years, after realizing that they have no added value over local banks in most cases, and that the profit margin from these activities is negligible in comparison with the resources invested. In a less rosy scenario, the banks have more than once clashed with the local authorities in countries, after it emerged that they were not complying with the rules.
The most notorious case, of course is the ongoing investigation by US authorities against Bank Hapoalim and Mizrahi Tefahot Bank on suspicion of abetting tax evasion by their customers. The investigation originally also included Bank Leumi, which wound up paying a $400 million fine to settle the matter.
Bank Leumi, the first to be burned by the investigation, has begun to drastically cut back its activity. The bank has closed and sold a major proportion of its activity, headed by Bank Leumi Switzerland; its remaining overseas activity is confined to the US, London, and Romania. Bank Hapoalim has also reduced its business, but still has considerable international activity in a number of countries. Israel Discount Bank (TASE: DSCT) has also taken steps to substantially cut back on its overseas activity, retaining only Discount New York, the largest Israeli bank in the US.
First International Bank of Israel (TASE: FTIN) closed down its activity in London and Switzerland, and is now the only one of Israel's five largest banks with no current international business. Mizrahi Tefahot Bank, which is under investigation by the US authorities, still has small-scale overseas business in Switzerland, London, and Los Angeles. Over the past two years, the bank closed down its offices in Latin America.
Published by Globes [online], Israel Business News - www.globes-online.com - on September 28, 2017
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