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The banks' results for the first six months were terrible, with the exception of one item - their nominal financial results. Meaning, their results not adjusted for inflation.

Of all the companies in Israel, the banks are supposed to be the primary beneficiaries of the transition to nominal reporting planned for 2003.

To understand the significance of the change, look at the figures.

For the first six months of 2002, Bank Hapoalim reported netting NIS 442 million. In nominal terms that would have been NIS 1.04 billion, a staggering NIS 600 million more than it actually posted for the period in question.

Bank Leumi would have reported a nominal profit of NIS 844 million, rather than an inflation-adjusted figure of NIS 304 million.

Israel Discount Bank and the First International Bank of Israel would have gone one better, converting losses of NIS 124 million and NIS 148 million respectively into profits of NIS 78 million and NIS 4 million respectively.

The reason for the huge gap between nominal and inflation-adjusted results is the leap in consumer prices in the first six months of the year.

In a few weeks, the Accounting Standards Council will be making a final decision on the transition to nominal financial reporting as of 2003. Council head Professor Eli Amir recently said he supports the transition to nominal results - if the inflation forecast for the next twelve months is in single digits.

The council wants to bring Israel's accounting standards in line with those of the rest of the world. It is looking at the economy as a whole, not specifically at the banks.

If Amir's position is accepted, the Bank of Israel will find itself facing a problem.

On one hand, the central bank, as part of its traditional policy of striving for price stability, is among the prominent supporters of a transition to nominal reporting.

On the other hand, there are fears that the transition to nominal reporting will increase the banks' ability to hand out dividends, thus diminishing their equity and undermining their stability.

Supervisor of Banks Yitzhak Tal has directed (not ordered) the banks to stop paying dividends for the time being, given the shaky state of the banks. If the banks had published nominal reports this year, they would have been able to hand out the difference between the nominal result and the inflation-adjusted result as a dividend.

In other words, a technical change of accounting laws with no significance for actual cash flow would have enabled Bank Hapoalim to hand out a dividend of NIS 600 million.

How will the Bank of Israel solve this dilemma?

There are two apparent solutions. The first is to support a one-year postponement of the transition to nominal reporting until the economic situation becomes clearer.

The second is to support a transition to nominal reporting, but to prevent the banks from handing out dividends if the improvement in their results is merely due to ceasing to adjust them for inflation.

Either way, the central bank may well find itself perceived as inconsistent.