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The crisis has done good for banks: why should we pay for it?
The profitability of the large banks in Israel is generally mediocre, but it seems that the corona crisis has led to particularly positive reports - which will lead to handsome dividends.
Dr. Avichai Snir wonders if the taxpayers are the ones who should fund it
Tags
Bank of Israel
Banks
financial reports
Avichai Snir
Tuesday, 17 August 2021, 09:09 Updated: 10:04
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Especially in times of crisis - profits increase (Photo: Walla !, Shai Oknin, Reuven Castro, Uri Lenz)
At the end of the play "Opera in a nutshell", the play's protagonist, thief and murderer McKee Knife is about to be hanged.
When he sees in front of him the hanging rope, McKee complains that the judges are unfair, because "what is bank robbery versus bank ownership?"
As an economist, I know Mackie is wrong.
The economy can do without robbers, but even though the banks do make their owners big profits, the economy cannot do without them.
On the other hand, the reports published this week by the major banks, and the fact that the Bank of Israel allows banks to distribute dividends on the basis of these reports, shows that sometimes Shemki can still be right.
More on Walla!
The corona year at Bank Hapoalim: a dividend of NIS 618 million
To the full article
Banks are still conservative - but the government has poured money
This did not happen because our banks suddenly became more efficient.
This did not happen because in the Corona period they were willing to take particularly big risks to go for the benefit of the customers, and those risks paid off for them now
For years, banks in Israel have produced very mediocre results. Compared to banks in other countries, they are ranked low in terms of their operational efficiency, high in terms of the wages they pay to their employees, and moderately ranked in terms of their profitability. This is despite the fact that since the crisis of 2008, the Israeli economy has grown faster than in most developed countries, and the percentage of borrowers who have not repaid their loans has been much lower than in the world.
The bottom line is that our banks are very conservative, and that they could have given more credit if they were willing to take a little more risk. To their credit it can be said that part of their conservatism stems from over-regulation, but another part is the fact that they should not take too many risks. When there are only five banks that share the market, it is possible to make a very good profit even without taking too many risks.
Still, in 2021 the banks made fantastic profits. Total profits of over NIS 5 billion in the second quarter, and a return on capital ranging from 14.5% to 21.3%. These are numbers that even the most efficient banks in the world do not reach, and as mentioned, under normal conditions, our banks do not even approach them.
This did not happen because our banks suddenly became more efficient. This did not happen because in the Corona period they were willing to take particularly big risks to go for the benefit of the customers, and those risks have paid off for them now. It happened because of three factors.
The first is the fact that the Corona period forced businesses and individuals to take out loans, and banks were the most available source for these loans.
The second is the fact that the government poured money to prevent businesses and individuals from going bankrupt, and that money was used to repay the debts to the banks.
The third is the fact that the Bank of Israel lowered interest rates and removed some of the restrictions on mortgages, which warmed the housing market and brought mortgage income to new highs.
More on Walla!
Uri Levin with a record quarter for Discount: NIS 860 million profit and return on equity of 18.3%
To the full article
Missed opportunity
In short, when there is no competition and the government is pouring money, the banks had to make a profit. But the willingness of the Bank of Israel to let banks distribute a large portion of profits as dividends is cowardice.
When the crisis broke out, it seemed that the banks were giving loans at too high interest rates and today it turns out that the interest rates were really too high, because otherwise the banks' profits would not have been so great. The Bank of Israel did not intervene because it claimed that the banks were the only ones who could assess the risk and therefore any intervention would jeopardize the stability of the banks.
The Bank of Israel now had an opportunity to do something about it. If the Bank of Israel had forced the banks to keep the small profits they made in 2021 as part of their capital adequacy ratio, then the risk of the banks collapsing in the next crisis would have been lower.
This would allow the Bank of Israel to force the banks to give customers better terms, even if it means that the banks will take on a little more risk.
But the regulator does not do that, so even in the next crisis, it will allow banks to take whatever interest rates they want, the government will pay, the banks will profit, and the public will pay taxes to repay the government's debts.
Dr. Avichai Snir - Netanya Academic College and Bar-Ilan University
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