Raising the bank's minimum capital ratio will be inevitable in the long term, Supervisor of Banks Yitzhak Tal said yesterday at a banking sector conference at Tel Aviv University.
"The minuscule minimum capital ratio that the banks are required to maintain is a major variable. Although it climbed from a rate of 9.24% at the end of 2000 to a rate of 9.38% at the end of 2001, if one takes into account other factors, such as the composition of the capital and the state of individual banks, then this involves deterioration," Tal noted.
Tal said that today demand for credit has dropped due to the economic situation, but loan applications from problematic borrowers have risen. Tal added that renewed demand for credit will be accompanied by a rise in profitability which will create credit sources for the banks.
"If one examines the potential of providing credit, without additional financing rounds, and assuming that the banks sustain the same level of profitability as in 2001, while avoiding distributing dividends, then the banks can grant additional NIS 70 billion in credit, of which Bank Leumi's share is the largest, some NIS 40 billion," Tal said.
Tal said that in most of the banks, maybe even in all of them, the capital adequacy requirements do not allow distributing dividends in the near future. He said that should any bank choose to do so, it would be very strange, and the central bank will exert its influence to prevent such distribution.
The supervisor said that the banks' low minimum capital ratio is expected to hurt the whole Israeli economy. "Minimum capital ratio and the ability to expand the shrunken credit, emphasize the risk in exaggerated dependence of the Israeli economy on banking credit, and emphasize the importance of developing the capital market.¿
Tal said that although minimum capital ratio is officially 9%, higher than in several Western countries, in effect it is lower compared with developed countries, and comes to 9.4% compared with 12% in developed countries. Tal said that Bank of Israel believes that over the longer term it is unavoidable that the regulator intervene in order to increase minimum capital ratio. He said that the big banks have already understood that. Privatizing Bank Leumi: Dangers of excessive sale
Regarding the privatization of banks, Tal said it is not in teh state's favor to own bank shares. At one time the arrangement was designed to distance the state from ongoing bank management, which was considered problematic even then, and all the more so today.
He said that to this day the concept of privatizing the banks involves selling the control. Tal says this offers several advantages: clearly identifiable owners, stability in control, a clear connection between the capital interest and control, and an address for demands to increase capital, and for other needs.
Tal also noted the adverse aspects of privatizing the banks: Increased centralism, creating problems in the financing of affiliates, and direct involvement in management.
"We believe the option of diverse sale through the stock exchange must not be implemented without preparing an appropriate legal infrastructure," Tal declared.
The supervisor said that perhaps diversified ownership is ideal, but such decentralization increases the risks. For instance, undesirable entities, such as insurance companies, could obtain a certain amount of control without licenses. "Entities that own big share blocs, but less than 10%, could attend a shareholders meeting and choose their own directors and control the bank, at least for a period of time." He added that one shouldn't forget that a bank's board of directors virtually controls the bank.
Tal also said illegal agreements, such as voting agreements, can be made. "Another problem could be an inability to elect a board, and also de facto control by negative entities."
An appropriate legal infrastructure should include means for identifying shareholders and examining how they vote in a general meeting of shareholders, in order to determine whether illegal arrangements have been made, Tal said. He added that one should prohibit control through ad hoc agreements.
A legal infrastructure is required that would ensure appointing a board in any situation, and that in addition it is necessary to strengthen the supervision of the board, the management, and their structure, Tal concluded.