Gov’t bows to BoI Governor’s pressure on bank interest bill

Bank of Israel Governor Prof. Amir Yaron has successfully persuaded Israel’s political leaders to remove from the agenda of the Knesset plenum proposed legislation requiring banks to pay interest on consumer current accounts. The bill, which was approved last week by the ministerial committee on legislation, would have required banks to pay interest at a minimum rate set by the Bank of Israel Governor and approved by the Minister of Finance.

Just before the bill was to be presented for a preliminary reading by the Knesset it was withdrawn from today’s agenda and suspended.

Even though the bill has been removed Yaron is expected to meet with Minister of Finance Bezalel Smotrich and his top officials today. It is believed that the Ministry of Finance will try to promote other bills to reduce the profitability of the banks, which amounted to a combined NIS 6 billion in the first quarter of 2023. Smotrich recently announced that he will impose a profits tax on the banks claiming that their profits are too large and are not being passed on to customers.

Smotrich’s aides insist that the meeting with Yaron is routine and was set long before the Bank of Israel Governor’s angry letter yesterday insisting that the law requiring banks to pay interest on current accounts was a blow to the independence of the Bank of Israel.

He wrote, “The proposed legislation in which the minimum interest rate on current accounts would be set by the Governor of the Bank of Israel is subject to the approval of the Minister of Finance, constitutes a very serious blow to the independence of the Bank of Israel and its ability to manage monetary policy. The Minister of Finance would be given the authority to actually influence the interest rate in the economy and to blatantly interfere in the management of monetary policy and its effectiveness. The violation of the central bank’s independence embodied in the bill is a real red line being crossed and there is a real concern that it would be perceived as such by the international authorities and the rating companies,” the Governor warned.

He added, “Setting a uniform price harms the activity of the market mechanism, causes all the players to gather around the set price and in every way suppresses competition and efficiency; gives rise to significant application difficulties with regard to the method of calculating the price; and is seen internationally as a negative move that does not suit advanced economies in developed countries.

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“I am concerned that this kind of blatant interference through legislation could affect not only international financial entities that are considering operating in Israel, but also international business entities in other areas of the economy. Focusing the discussion on a single step in the field of current affairs, certainly when it is carried out while intervening in pricing, is not optimal for customers,” Yaron further noted.

Yaron recalled that last week he convened an urgent meeting of the banks’ CEOs in which he instructed them to find solutions on the issue of interest rate on current accounts as well as to improve passing on interest rate hikes to deposit accounts, especially for households as well as to find solutions that would ease the situation for consumers in overdraft.

Published by Globes, Israel business news – en.globes.co.il – on June 28, 2023.

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