Extending more credit to the floundering

Industrial Development Bank (TASE:

INDD.GG

) is exactly the same as printing money, commented Bank of Israel governor David Klein on Monday.

"Lending money to a commercial bank is printing money, to all intents and purposes, and should be offset from the regular influx dictated by policy to maintain price stability. It could even widen the interest rate gaps," Klein said at a meeting with Prime Minister Ariel Sharon, devoted to the Industrial Development Bank collapse.

Extending a loan under preferential terms to the troubled bank sends the wrong message regarding monetary discipline to the banking establishment, Klein warned. "If the government intends to subsidize Industrial Development Bank it should be done through budget priorities and weighed together with the other government expenditures," he said.

The Bank of Israel formally announced that it supports the solutions proposed by the Finance Ministry, as approved by the government, regarding an arrangement for Industrial Development Bank. The bank's assets and commitments will be sold off within four months, which should bolster the stability if the financial system.

The central bank also spelled out its opinion that Industrial Development Bank's problems were generated by a combination of business strategy focusing on corporate borrowers and the recession, which has impacted on the entire financial establishment.

At Industrial Development Bank, the Bank of Israel continued, an imbalance was created by the spate of withdrawals. To restore balance, the bank must speedily cut back on its credit to the public, to reach a magnitude sustainable by the deposits.

It also has to increase efficiency at all levels: workforce, wages and managerial expenses, the central bank said.

Industrial Development Bank has undertaken to prepare a plan within three weeks to restore profitability.

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At the government's request, within 30 days the Bank of Israel will prepare a report on events at Industrial Development Bank.

Rebutting the criticism at Knesset

Earlier today, Supervisor of Banks Yitzhak Tal rebutted criticism voiced yesterday by Prime Minister Ariel Sharon that the central bank behaved irresponsibly.

"This isn't the time to assign blame," Tal said at a meeting of the Knesset's Finance Committee today. "Everything should be done to save the depositors. More could have been done to prevent the fall of the bank and not necessarily by the (central bank's) supervisory department."

People always look to assign blame to the supervisory department, Tal continued, without looking at other factors too.

The committee members also criticized the bank's chairman, Ra'anan Cohen, who had been in the seat for under two weeks.

After the committee debate, its members Avshalom Vilan and Nahum Langental noted that Cohen had been a political appointee, and not the firstm at Industrial Development Bank. "The bank was managed like in the fourth or fifth world," they said.

The committee members accused the Bank of Israel of falling asleep on the job. "It was its duty to diagnose its bad condition," they said.

Cohen commented that only he, as an ex-politician, could have recruited the government's help so fast, and nipped the crisis before it could get worse and spread to the entire banking establishment.

Industrial Development Bank found itself teetering on the edge of insolvency as an earnings warning for the second quarter, followed by its second-quarter statement helped spark a run on the bank.

Customers lined up in the hundreds to withdraw money despite government assurances that the state-run bank would be backed by national resources. But squabbling between the Finance Ministry and Bank of Israel over the lifeline for the bank delayed implementation while the withdrawals continued. On Monday the central bank extended the promised credit, but meanwhile the bank's overdraft at the central bank has reached a billion shekels.