Governor of the Bank of Israel Karnit Flug and Minister of Finance Moshe Kahlon are close to agreement on separation of the third credit card company, Israel Credit Cards Ltd. (ICC-Cal) from ownership by Israel Discount Bank (TASE: DSCT) and First International Bank of Israel (TASE: FTIN), sources in Jerusalem believe. The sources said that Flug would agree to the separation of the third credit card company under certain conditions. The Bank of Israel today said, "There is no change in the Bank of Israel's views on the subject of ICC-Cal separation."
Negotiations between Flug and Kahlon are taking place behind the scenes, while the Committee for Increasing Competition between the Banks (the Strum Committee) is preparing for a public hearing on the recommendations in its interim report submitted to the Minister of Finance on December 14, 2015. The main bone of contention is the question of supervisory authority over the credit card companies after the separation.
The Strum Committee's interim report recommended that responsibility for supervision and regulation of the credit card companies be retained by the Bank of Israel Banking Supervision Department, but Kahlon has already announced that he does not regard himself as bound to accept the recommendations of the committee he appointed.
The coalition agreement with Kahlon's Kulanu Party explicitly states, "Authority for supervision of the credit card companies will be given to the Minister of Finance."
Kahlon's plan to remove the Capital Markets, Insurance, and Savings Department from the Ministry of Finance and set up a separate authority to supervise credit institutions and concerns is based to a large extent on the desire to create a mechanism that can supervise the credit card companies.
"Disproportionate damage"
In its interim report, the Strum Committee recommended that a controlling interest in the bank-owned credit card companies be sold within two years, and the banks' remaining holding be sold within one year after that. Concerning ICC-Cal, the third credit card company, the report states that within four years, the implementation committee will consider whether its separation from ownership by the medium-sized banks is necessary, "in view of the development of competition in the market."
The exemption for ICC-Cal, jointly owned by Discount Bank and First International Bank, from the separation requirement was granted at the demand of the Bank of Israel representatives on the committee - Deputy Governor Dr. Nadine Baudot-Trajtenberg and Research Department director Prof. Nathan Sussman - despite the opposition of four other committee members.
Sussman and Baudot-Trajtenberg opposed in principle a situation in which Israel has no bank-owned credit card company, saying there was no precedent for this anywhere in the world. Their insistence concerning ICC-Cal was explained by a desire to avoid "disproportionate damage" to the medium-sized banks and their ability to compete with the major banks.
ICC-Cal currently provides more than one third of the total credit provided by the credit card companies, amounting to a total of 5% of all non-housing consumer credit. ICC-Cal is considered the most expensive credit card company in the commissions it charges customers and business owners.
Sussman and Baudot-Trajtenberg noted that removing ICC-Cal from the banks would severely detract from Discount Bank and First International Bank's ability to compete in the regular banking credit market, because ICC-Cal accounts for a substantial proportion of these banks' profit, which is translated into capital used as a basis for providing credit.
The recommendation to exempt ICC-Cal from separation was opposed by the Ministry of Finance representatives on the committee, representative of the public Prof. Avi Ben Bassat, and the Antitrust Authority. In a minority opinion on their behalf attached to the report, all three of these parties stated, "Turning ICC-Cal into a non-banking concern, together with the other two credit card companies, will make it possible to maximize the competitive benefit of the measure, and will create in the short and medium-term three supervised concerns with significant volumes of activity and recognized brands attached to the payment systems. These concerns can compete with the banks."
"On the other hand," the minority opinion stated, "leaving ICC-Cal in the hands of the banks will restrict the effect of the measure, and is liable to affect the actions of the other credit card companies, thereby maintaining the coordinated balance between the banks and the credit card companies."
In a document, referred to by Flug as the "alternative report," and published in "Globes," the Ministry of Finance representatives on the Strum Committee, budget director Amir Levy and his deputy, Yael Mevorach wrote, "Not separating ICC-Cal when the other two credit card companies are being separated from the banks creates a significant competitive advantage for ICC-Cal in both capital resources and access to customers.
"This competitive advantage over the other companies will have a negative impact on competition in the credit market. In addition, past experience does not indicate that ownership of ICC-Cal by Discount Bank and First International Bank constitutes a catalyst for strong retail credit competition in domestic banking.
"First of all, the companies have owned ICC-Cal for many years, and there is no evidence of greater competition on their part than, for example, banks that do not own a credit card company.
"Secondly, Discount Bank is the most inefficient bank in the banking system. It is possible that as a significant source of profit for the bank, ICC-Cal is making it more difficult for the bank to take internal streamlining measures."
Published by Globes [online], Israel business news - www.globes-online.com - on January 20, 2016
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