The Knesset’s dramatic passage of the financial reform bill on July 19 is bound to have immense repercussions. By encouraging new entrants and by ushering in price-cutting and efficiency-generating competition, the reform can finally put to productive use NIS 1.6 trillion in public savings, which have been squandered by a banking duopoly managed by incompetent bankers.
The bankers gave most loans to their cronies (the huge credit given to a sinking Clubmarket chain is just a recent example of how they sink billions of their customers’ savings into losing enterprises) who wasted them on failed enterprises, thus deepening a six-year recession and causing widespread unemployment, low wages and a plethora of social problems resulting from the inability of hundreds of thousands of families to make ends meet.
The Knesset enacted the reform 20 years after it was first proposed. But as Prof. Marshall Sarnat, president of The Financial Institute of Israel (formerly professor of banking at the Hebrew University and the expert on the Bejski Commission) pointed out, the reform “is a necessary (but not sufficient) condition for creating a truly competitive and efficient capital market.”
It opens the door to new entrants, both domestic and foreign. However, the key to its success lies in the hands of the banks that will remain, after the reform, the principal investment advisers and marketers of financial products. The critical problem is how to ensure that the banks, in their new role, will not compromise the reform by discriminating among suppliers (of financial products) for their own gain. Realizing this objective does not require additional regulations and legislation, but it does require the strict enforcement of existing legislation, which stipulates that all fiduciaries act solely in the best interest of their clients.”
Easier said than done.
One of the major problems facing new entrants into the banking industry is the Byzantine nature of excessive Israeli regulations, which Nobel laureate Milton Friedman described as the most complicated in the Western world. Excessive regulation has inhibited competition since it imposes heavy costs and complicated, time-consuming bureaucratic burdens on those entering the field, while our bank duopoly, with its enormous economic and political clout could ignore this regulation, and even flout the law with impunity. One of the most urgent tasks facing the advocates of competition is a massive reduction in regulation.
MY COLLEAGUE Isaac Devash, a financial expert who was among the group of reformers who formulated the initial capital markets reform strategic plans, lists a number of other tasks necessary for the successful completion of these reforms.
First is the need to reduce the national debt, which consumes about a third of Israel’s public financial assets. The Finance Ministry will also have to address the public sector workers’ non-cumulative pension schemes, a form of national debt.
Second, stronger competition must be fostered in retail banking by easing customers’ ability to switch among banks and other saving channels (such as the Postal Bank, the Internet etc.).
Third, the Basel 2 Convention must be adopted soon, so that loans can be rated and Israeli banks encouraged to clean up their NIS 60 billion “problematic” debts.
Fourth, high-level global asset managers should be attracted to Israel to end the dominance of Israeli markets by an old boys’ network, and to secure true competition.
Last, the Finance Ministry should map the gaps in Israel’s financial products, players and regulations by comparing our markets with successful international markets. The information can serve as a basis for further reforms and for innovation.
All these steps will help complete the process of transformation that Finance Minister Binyamin Netanyahu courageously started two years ago when he faced a market where more than 50% of Israel’s $50 billion public financial assets were managed – or effectively controlled – by either the labor unions’ Histadrut pension funds (about $30b.), the government (about $90b. in Leumi and Discount banks which the government then owned), and by a banking duopoly (about $60b. in mutual and provident funds) rife with conflict of interest.
Netanyahu’s reforms are introducing market discipline and competition into this crucial sector by encouraging accountability and decentralization. More money will be directed to investment than debt, to smaller and medium-sized growth businesses rather than to the huge monopolies. If this is not a revolution that will have immense repercussions, what is?
Finally, a word about the public’s involvement.
It is said that the public is uninterested in economics. But how could they be when the educational system turns out either economic illiterates or worse, indoctrinated crypto-Marxists. Economic ignoramuses cannot fathom what politicians are doing with their taxes (which represent half their working life!), or how economic retardation negatively affects their ability to earn a living. The media further compounds the ignorance and confusion by either ignoring crucial economic issues (the reform resolution was barely mentioned on evening TV long after a story about the stealing of humus beans) or misrepresenting them, as it did with the financial reforms, either because it feared the banks, or because of its myopic ideological approach that has Channel 1’s Oded Shahar obsess with false issues of “equality” while ignoring the huge exploitation of consumers by monopolies.
It is high time to ask why the Israeli taxpayer should continue to finance a profligate educational system and public TV, that instead of providing it with vital knowledge is indoctrinating it with its damaging ideological agenda.
