Proposed bill a ‘serious blow’ to Bank of Israel’s independence, governor warns

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Bank of Israel governor Amir Yaron warned on Tuesday that the advancement of a proposed bill that gives the finance minister authority in influencing the setting of minimum interest rates on consumer bank accounts would constitute a “very serious blow” to the independence of the central bank.

In a harsh letter sent to Prime Minister Benjamin Netanyahu, Yaron expressed his strong opposition against the proposed legislation asking him to immediately intervene and remove it from the agenda. Following the publication of the letter, the Tel Aviv Stock Exchange’s benchmark TA-125 index and the TA-35 index of blue-chip companies closed down more than 1%. The shekel depreciated about 1%.

“The violation of the central bank’s independence embodied in the bill crosses a red line, and there is real concern that international entities and credit rating agencies will also perceive it that way,” Yaron wrote in the letter.

The bill proposes that interest paid by the country’s lenders on current accounts will be set by the Bank of Israel governor subject to the approval of the finance minister. The proposed legislation, which was approved by the Ministerial Committee for Legislation on Sunday, is expected to be brought to a vote in a preliminary reading in the Knesset on Wednesday.

Yaron further explained that the proposed legislation would infringe the central bank’s ability to conduct and manage monetary policy as it would give the finance minister the authority to influence the interest rate in the economy.

“I am strongly opposed to intervention in the pricing of banking products and to setting a uniform price,” Yaron wrote in the letter. “Setting a price harms the activity of market mechanisms; causes all the players to focus on a set price and thus suppresses competition and efficiency; and creates great difficulties when it comes to price calculation.”

Illustrative: Israelis walk next to Bank Leumi in Jerusalem, on November 16, 2014. (Yonatan Sindel/Flash90)

In addition, the central bank head cautioned that passing such legislation would be seen “internationally as a negative move that is not appropriate for advanced economies in developed countries.”

Yaron also uttered concern that the “blatant interference” directed by the proposed legislation could affect the decisions not only of international financial institutions considering operating in Israel, but also of international businesses in other fields of the economy.

The proposed legislation comes after Yaron last week summoned the CEOs of the country’s banks to his office in Tel Aviv to discuss interest rate policies on deposits, current accounts, and loans. The central bank head ordered Israel’s lenders, which have been enjoying huge profits from higher interest rates, to pass on those rates to customers and start paying interest on funds sitting in current accounts.

The public has about NIS 1.4 trillion in local-currency bank deposits, of which more than NIS 500 billion is sitting in current accounts, according to the Bank of Israel. Depositors rarely receive interest on these balances, but the banks generate interest income from them. That’s as the Bank of Israel has steadily hiked the benchmark interest rate over the past year from a record low of 0.1% in April 2022 to 4.75% this year to try and cool inflationary pressure.

Israeli banks have in recent months come under fire and great scrutiny for not fairly passing on or being slow in passing on the benefits of higher interest rates to deposit holders, while fully profiting from the fruits of high rates on loans and mortgages.

The interest rate that banks charge Israelis who take out household loans averages around 10%, while rates on deposits average between 2% and 4.5% depending on size and duration. The discrepancy, which has been fueling the banks’ hefty profits, has been causing outrage among the general public and some politicians in recent months, who have been accusing Yaron for causing damage to the economy.

View of the Bank Hapoalim offices in the center of Tel Aviv, August 04, 2015 (Miriam Alster/FLASH90)

At the end of last week’s meeting, Yaron instructed the CEOs of the banks to update the Supervisor of Banks on their preparations and plans for achieving the targets he presented within a short period of time. The central bank has previously warned the lenders that in case they fail to meet the objectives set forth, it will not hesitate to wield its regulatory tools for enforcement.

In the letter to Netanyahu, the central bank chief said that following the meeting, the lenders were examining the goals presented, and each bank was putting together its own package, with some of them already offering interest on credit balances in current accounts.

Yaron conceded that there is not enough competition in the banking system, but emphasized that the solution is to encourage competition and not interfere with the operations of the banks.

“There is room to continue improving competition in the banking sector, mainly in the consumer credit segment for households and credit to small and medium businesses,” Yaron wrote. “The best way to improve customer welfare is by continuing to remove barriers that prevent competition between existing players and those that prevent the entry of new players.”

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