Leader DS slams central bank, treasury for failing to assume responsibility for Trade Bank debt

The fact that the central bank didn't immediately hold a press conference and announce plans to stand behind Trade Bank customers, is severely damaging investor confidence, particularly foreign investors, in the banking system, analyst Yuval Ben Zeev from investment bank Leader DS estimates.

He said that when a bank collapses in a developed country, such as the United States, the treasury secretary and the Federal Reserve chair immediately call a press conference to clarify the details of the event.

He said the supervisor of banks failure to calm Trade Bank customers with such an announcement, shines a negative spotlight on the whole banking system, the Bank of Israel and to a certain extent also the finance minister.

The analyst estimates the main victims will be the smaller banks, such as Union Bank of Israel and Bank of Jerusalem. He says the central bank failing to offer a guarantee for Trade Bank's debts, raises doubt about how the central bank will behave should a similar event happen in another of the smaller banks.

Ben Zeev expects lesser damages for the big banks because an embezzlement in Bank Leumi or Bank Hapoalim proportionate to the NIS 250 million embezzled in Trade Bank, means an embezzlement of over NIS 50 billion, which he considers highly unlikely. Bank of Israel's failure to intervene in a case of that magnitude would result in economic collapse. He noted that in the early 80s, during the bank share scandal, the state intervened and assumed responsibility for the debts of the big banks.

Bank shares collapsed in October 1983. The Bejsky committee charged the banks with manipulating the price of their own shares, and recommended legal proceedings against the management echelon of the offending banks. In October 1988 the government paid some $7.3 billion to buy back the controlling interest in the seven banks that had regulated their share prices through October 1983: Bank Hapoalim, Bank Leumi, Israel Discount Bank and the IDB group, Bank Mizrahi, Union Bank, the Funding and Commerce Bank, and General Bank (today Investec General Bank).