Some 250 customers of the
Industrial Development Bank (TASE: INDD.GG) stormed the bank yesterday morning. Some wanted clarifications, and some just wanted their money. The Industrial Development Bank's offices in Asia House, Tel Aviv, are not equipped to deal with hordes. It was reduced to handing out numbers on orange bits of paper. The Ha'aretz correspondent received No. 194, and stood in line listening to the customers fume. Your average Industrial Development Bank customer doesn't read the bank's financial statements. They don't know what a "capital adequacy ratio" is. They do know that the bank is controlled by the state. But yesterday they couldn't have cared less who owned it they wanted their money back. Yet the run on the bank was not a scene of panic. Most of the customers believed that the state's guarantees would save their savings but nobody could promise that would still be the case tomorrow, or next week. Unlike Trade Bank, which crumbled after having half its assets stolen, at Industrial Development Bank the main problem was not economic, or even one of pure banking. True, it did become embroiled in a number of dubious credit deals because of bad management, but it is far from using up its equity. No, the bank's problem is one of faith. And for a bank, faith can be a more important asset than mere economic fundamentals. No bank, no matter how big or stable, can survive when its depositors are doubtful about it, its management, its accountants, or the regulators who monitor its operations. Even though Ra'anan Cohen was its chairman for all of twelve days clearly, appointing a chairman hopelessly innocent of banking experience did not exactly bolster the depositors' faith in the bank, in these hard times. In interviews to the press yesterday, Cohen promised that everything would be all right. That only served to fan the fire of the customers' fears, when they remembered that the brand-new chairman hasn't the slightest clue about the bank he leads. That is why the central bank's Supervisor of Banks, Yitzhak Tal, cannot disown responsibility if the run on the bank continues. Tal is the man who said, just three months ago, that he is not empowered to intervene in Cohen's appointment as chairman of Industrial Development Bank, and that the decision belongs to the directors. But Tal knew that his decision not to intervene placed a person with zero background in banking at the head of an institution whose financial status was already faltering. As the person accountable for the financial stability of the banks, he knew that the fact of a political appointment like Cohen's at such a sensitive, tough time for the banks, would deliver a very bad message to depositors. Tal did not need to have formal authority to prevent Cohen's appointment. He could have summoned the bank's directors and spelled out his view that the nomination could undermine the bank's stability and the public's confidence. The directors would have taken the hint and informed Industry minister Dalia Itzik and Prime Minister Ariel Sharon that they would not accept responsibility for the risk. But Tal was busy overseeing the collapse of Trade Bank, and decided not to open another front with the Industrial Development Bank. He probably regrets that decision now, given that the resulting run on Industrial Development Bank is much, much worse for him than the bust of Trade Bank. Industrial Development Bank's balance is NIS 14 billion 30 times bigger than that of Trade Bank. Its collapse is a body blow to the image of the Israeli banking establishment, and will force the Bank of Israel to take drastic measures, such as to immediately marry off all the little banks. Moreover, the whole Industrial Development Bank affair came at a particularly bad time. Bank of Israel figures published just yesterday indicate that in July, Israeli investors continued to withdraw bank deposits and transfer the money to foreign banks. Even though the shekel gained ground in July, Israeli customers exported NIS 220 million lifting the total transferred to foreign banks this year, to $1 billion. The shift to foreign banks when interest on the dollar is 7% below that on the shekel attests to the tremendous risk that investors associate with the Israeli marketplace in general, and to the banks in particular. The flight of money, and events surrounding the liquidation of Industrial Development Bank, should cause not only the banking system and the Bank of Israel to search their souls; they should also remind the Israel Securities Authority and Israel's accounting industry what it means when the public loses confidence in a wide-open capital market. The industry that has sprouted in Israel in recent years, of placing bloated evaluations on companies in order to justify dubious accounting practices; the banks' efforts to reschedule credit and roll over loans to avoid writing them off; and all those other ploys that try to whitewash the dire economic situation could well boomerang, leading the companies' and banks' customers, investors and borrowers to flee. The various accounting gambits are technical in nature, but concealing the ills could spark a real crisis of confidence. Then, investment would crash to a halt, the price of capital would soar and the business sector would bog down. Israel's banks are still a far cry from Japan's. Nor have we had an Enron-style case of fraud. But the marketplace is in fragile condition and we cannot afford more mishaps like the crumpling of Industrial Development Bank.