Bank Profit Dispute Highlights Economic Concerns

At the heart of the ongoing debate are the substantial profits of banks, projected to hit around 30 billion shekels by 2025, with estimates for this year nearing 34 billion shekels.

The main issue is whether these banks have boosted profits by increasing the interest rate gap between invoices and payments or if they’ve actually reduced that gap while seeing a significant rise in operating capital, alongside layoffs as part of efficiency efforts.

A senior banker illustrated the situation with a relatable example: a clothing store sold far more coats this fall than the previous year due to unexpectedly harsh winter weather. Despite not raising prices, the store’s profits surged from high sales volumes. Is it fair to penalize the store owner in such a case? he questioned.

In contrast, senior officials from the Treasury and the bank tax investigation team expressed differing views. They noted a marked increase in interest income relative to the banking system’s total assets since the second quarter of 2022, even amid the war. While bank fees have decreased, one Treasury official remarked that the disparity between loan interest rates and near-zero deposit rates reflected poorly on the banks, particularly in wartime.

This official further pointed out that many customers, some of whom have served long stints in reserve duty, have received “crumbs” from their banks. Instead of supporting their clients during tough times, the banks seem to have taken advantage of the situation, leaving customers with limited options to contest what appears to be an exceptionally fine-tuned system.

There is consensus on several points. The Bank of Israel’s policy interest rate is currently among the highest globally, with banks as the primary beneficiaries. Although interest rate spreads are considerable, it’s worth mentioning that these spreads aren’t exceptionally high when compared to many other nations. This aspect was also discussed in the special committee examining the potential new taxes that Finance Minister Bezalel Smotrich wants to impose on banks.

Another evident point is that Israeli banking profits have risen by billions of shekels annually, even during wartime. Just like the clothing store, banks in 2025 will handle significantly more money than they did a decade ago while simultaneously laying off thousands of employees and closing branches, which has resulted in large profit margins.

About half of the committee members, primarily from the Bank of Israel and the Finance Ministry’s Budget Office, opposed the tax. Consequently, the committee did not make a clear recommendation on implementing new taxes for banks.

“With most bank stocks owned by the public, there are valid concerns that a permanent tax on profits could negatively impact the general population,” one committee member mentioned during discussions. “Such a hit to bank profitability might decrease stock prices, posing risks to pension and savings funds across various terms.”

Another official raised concerns that additional taxes on banks could eventually be passed on to consumers, worsening their financial condition. “Efforts to collect excess bank profits and redistribute them could end up harming the public,” he suggested.

Participants also referred to research from the Bank of Italy and the Bank for International Settlements, concluding that taxing bank profits tends to elevate loan rates. Essentially, the burden of increased taxes does not fall solely on banks; it is consumers who end up suffering, the committee noted.

The report indicated that beyond imposing higher corporate taxes on banks, tax hikes might adversely affect credit availability, impacting overall economic investment levels.

The competition authority, represented by Michal Cohen, strongly criticized the banks over the weekend, stating that their treatment of customers might warrant stricter regulations or even harsher penalties.

“Customers in this sector aren’t very proactive, which creates considerable barriers to transitioning between banks,” Cohen explained. “Banks tend to benefit from this inertia. They avoid being transparent about prices and offer complicated products, tying them to factors like credit card ownership.”

Cohen is considering an order to prevent banks from discriminating against retail customers regarding deposit pricing while ensuring complete transparency. “Customers will know exactly what they can earn at each bank, enabling them to shop for deposits more freely. We are in the process of designating banks as a concentrated market, allowing us to enforce directives to boost competition,” he stated.

Banking supervisor Daniel Khahiashvili opposed the idea of special taxes on banks, arguing that such a tax structure contradicts the competition they are trying to foster. “If taxes on excess profits are necessary, the government should find a way to implement them across the board, affecting all corporations, not just banks,” he remarked.

The discussion has shifted towards potentially extending the excess profits tax to other large firms that have experienced gains in recent years. Treasury officials have noted that restricting the tax solely to banks could face legal challenges. “Several listed companies exhibit high average returns,” they indicated. However, this data did not make it into the committee’s final report.

Ultimately, the Select Committee acknowledged mixed viewpoints in the debate over the bank tax, suggesting that the final decision should lie with political leaders.

In fact, the committee did not reach a definitive conclusion regarding a tax on banks. If a tax were imposed, it would likely be at half of what Smotrich proposed, set at 15% on 50% of profits exceeding those recorded from 2018 to 2022. The report clearly highlighted the potential downsides of such taxation.

The contentious debate surrounding the proposed permanent tax on banks, tentatively slated until 2030, is just beginning. Expectations for heightened discussions in parliamentary and judicial arenas are high. In the meantime, banks are likely to keep charging elevated interest rates on loans while maintaining lower rates for deposits, as profits need to continue flowing in the coming year.

When a friend inquired whether investing in bank stocks—whose values have recently declined—was wise, the expert replied, “Rather than seeing banks earn 34 billion shekels, they might edge down to 33 billion shekels.” The difference seems minimal, suggesting that whether one invests in Israeli bank stocks really won’t significantly impact the long-term scenario.