In an unusual move, Bank of Israel Governor Prof. Amir Yaron summoned bank managements to a meeting in his office in Tel Aviv, following staff work conducted at the Bank of Israel in cooperation with the Banking Supervision Department and the Research Department.
This is due to the Governor's dissatisfaction with the banks' insufficient "rollover" of the high interest rate in the economy to customers' deposits and checking accounts, while charging high interest rates on loans and deviations from the framework. In the background, there is strong public criticism of the huge profits made by the banks in the past year since the beginning of the interest rate increases, and bills by various Knesset members regarding the Bank of Israel interest rate.
The Governor presented to the banks his expectation of paying interest on current account balances and improving interest rates on deposits, and asked the banks to present concrete proposals to the Banking Supervision Department on this issue, including the interest rate for various types of customers.
Also present at the meeting on behalf of the Bank of Israel were outgoing Supervisor of Banks Yair Avidan and incoming Supervisor Danny Hakhiashvili.
Banknotes (illustration), photo: Dudu Greenspan
During the meeting, the Governor emphasized to the banks' CEOs that the high profitability in the banking system in recent times derives, inter alia, from the high volume of interest-bearing current account deposits and the insufficient transmission of interest on households' deposits in the current interest rate environment. This, while on the loan side there is an almost full transmission at the same time. All of these have led to a very high return on capital that is not sustainable in the long run. In addition, the importance of formulating targeted solutions for populations in particular difficulties was emphasized.
Encouragement and active assistance
During the meeting, the Governor noted positively some of the steps taken by the various banks on these issues for their customers recently, but clarified that this situation is insufficient and presented a number of goals that the banking system should act to achieve in order to benefit its customers and strengthen the system's fairness vis-à-vis them.
The main objectives raised by the Governor in the meeting with the heads of the banks:
* Payment of interest on funds in current accounts
* Ongoing active encouragement of customers with current account balances above a certain threshold to divert funds held in current accounts to more lucrative channels (such as term deposits or monetary funds).
* Active assistance to mortgage holders diagnosed as having the most significant difficulties.
* Easing the burden for customers with a negative current account balance.
Bank Leumi branch (illustration), photo: Yehoshua Yosef
At the end of the meeting, the Governor instructed the CEOs of the banks to report to the Supervisor of Banks regarding their preparations for achieving the targets he presented. The Governor emphasized that he expects each of the banks to adopt measurable and applicable steps to achieve the targets within a short period of time.
It should be noted that only a week ago, the Commissioner of Competition, Adv. Michal Cohen, issued a special report on the banks' conduct in the rising interest rate environment, entitled "A market with characteristics of a concentration group." The Competition Authority's conclusion was that if the banks had paid households the interest they pay private banking customers, it would have been more than NIS 4 billion a year that would have reached the public.
According to the findings of the examination, when it comes to competition in the banking system for customers who are households and small businesses, this is a market ostensibly characterized by a low level of competition, in which the banks rarely compete aggressively with customers of other banks. The Commissioner noted that this is a market that ostensibly has the characteristics of a concentration group.
"The banking system is profitable"
The Competition Authority's examination revealed that throughout the examination period (January 2017 to February 2023), the interest paid to households on their bank deposits is consistently lower than the interest paid to large businesses and private banking customers, despite the fact that households deposit their funds for an average period significantly longer than customers in other sectors. The findings of the examination revealed the gaps between the various sectors in the extent of the rollover of the increase in the prime interest rate from March 2022 to February 2023: while the increase rolled over to deposits of large businesses by about 101 percent and to private banking customers by about 90 percent, it rolled over to households by only about 68 percent—meaning that about a third of the increase in the prime interest rate remained in the pockets of the banking system.
Queue at Bank Hapoalim branch in Be'er Sheva, photo: Dudu Greenspan
Bank of Israel Governor Prof. Amir Yaron said, "The banking system is robust and profitable. Recently, the system has recorded very high profitability and a sharp increase in return on capital, inter alia, as a result of a combination of factors: current account balances that remain high, which constitute a source of zero cost for providing credit; Insufficient transmission of interest rates for deposits in the household sector and a high concentration of floating-rate credit, income from which increases with the increase in interest rates in the economy. It is essential that the banks know how to find a balance that reflects the value of fairness, between the interest policy on loans and the policy of interest on deposits and current account management, with an emphasis on households and small businesses."
Supervisor of Banks Yair Avidan said, "The Banking Supervision Department and the banking system place great emphasis on the fairness of the system vis-à-vis its customers. The objectives outlined today in the discussion are another step in improving fairness in the system regarding the various products and services. They can significantly assist and benefit the relevant customers and are a continuation of the customer's perception at the center. It is important to note that customers also have tools to compare and improve their conditions that we have promoted in recent years, and I call on them to continue using them."
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