It isn't every day that a bank writes off the equivalent of 10% of its equity.

Industrial Development Bank, which is co-owned by the State of Israel and the nation's three biggest banks, did just that in the second quarter, though. Blaming all on the recession and the terrible state of its borrowers, Industrial Development Bank said its second-quarter loss is about NIS 100 million, or 10% of its equity.

But behind the stock phrases "recession" and "deterioration in borrowers' status" lies a flawed credit policy lasting years. The entire banking establishment is hurting from the recession, which is precisely when "problem" borrowers started coming out of the woodwork.

Industrial Development Bank has two main "problem" borrowers: the Peled-Givony group, and businessman Gad Zeevi, for whom it had to set aside tens of millions for doubtful debt provision.

Industrial Development Bank's difficulties are exacerbated because unlike its parents banks Hapoalim, Leumi and Discount it doesn't have a cushion of households to shore up its income. The worst-performing sectors in its credit portfolio are construction and real estate, in which problem debt ballooned by 300% in a year, and hotels whose "problem" debts were multiplied by six within a year.

Its problems were well known, though, hence its announcement yesterday surprised nobody. In 2001 it lost NIS 19.5 million, and provided NIS 119 million for doubtful debt 75% of its revenue for last year.

Industrial Development Bank's losses in 2001 and 2002 totally eradicate its profits from three years.

Where was the watchdog?

As the market sent its share sliding, the bank immediately adopted a defensive pose, noting that it is rock-steady and holds NIS 8 billion in government deposits. But these deposits, which are indeed a secure source of income, merely help offset the bank's recent losses. They touch up a bad picture, they don't change it.

And where was the Bank of Israel's Supervisor of Banks? Surely the sorry condition of Industrial Development Bank isn't news to the watchdog? The Bank of Israel already ordered the Industrial Development Bank to maintain a 15% capital adequacy ratio, while the figure for the other banks stands at 9%. Not that it has: its ratio in the first quarter was 13.8%, and it's going to drop sharply in the second quarter.

Its capital adequacy ratio will be taking a hammering from another direction too. This year the Bank of Israel published new instructions for calculating secondary capital.

So if all this is old news, again we ask, where was the Supervisor, and why didn't he do anything? He could have ordered the bank to ditch some of its risk assets, thus returning to the required capital adequacy ratio, but he gave the bank an extension to year-end: Maybe time will heal the ills.

And what are the representatives of the people doing for it?

The truth is that the state has been ignoring the Industrial Development Bank, leaving it to do whatever it wants.

Although the bank manages NIS 13 billion worth of assets, evidently nobody thinks it should be run by a professional banker. No: until recently its chairman was Shlomo Borochov of the Russian immigrants' party Yisrael B'Aliyah, who had been appointed by party leader Natan Sharansky and won a salary of a million shekels a year.

Borochov's resignation as the bank's miseries multiplied could presented an opportunity to bring in a banker. But no. He has been replaced by ex-Labor party general secretary Ra'anan Cohen. The appointment was supported by Ministry of Industry and Trade Dalia Itzik, who evidently opines that a political appointee is just what a troubled bank needs most.

And what did the Supervisor have to say about the substitution of one political appointee with another? Uncharacteristically, he made his opposition public, but Cohen is still the chairman. To Supervisor Yitzhak Tal's credit, he couldn't veto the appointment, only try to influence it indirectly.

Industrial Development Bank's credit portfolio is NIS 11.7 billion. Its problem credit is NIS 1.2 billion. We may assume that the spanking new management is responsible for the remarkable scope of provision for doubtful debt, under the heading "cleaning out the stables" before it takes the reins. But given the sorry state of the economy, it probably won't be the bank's last provision.

We may also assume that the new management will waste no time casting the blame for the bank's problems on the former management.

But we mustn't let the flying mud blind us: the issue at stake is taxpayer money flung to the mercy of political appointees, whose affiliation with banking is about as close as the Road Runner's to rocket science. Could that possibly have happened at a privately-held bank?

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