Israel’s government postponed on Wednesday a preliminary vote on a bill forcing banks in the country to pay interest on checking accounts after Bank of Israel Gov. Amir Yaron warned such a move would impend the central bank’s independence.
The bill, sponsored by Likud lawmaker Yinon Azoulay, would mandate banks to pay interest on checking accounts, with the finance minister holding the final authority on setting the minimum rate, not the Bank of Israel. A first draft of the bill was approved by the Ministerial Committee for Legislative Affairs on Monday. Azoulay said that after consulting with Prime Minister Benjamin Netanyahu, he had decided to postpone the preliminary vote on the bill by one week, to allow Israeli banks to voice with the Bank of Israel their position on the matter.
The issue of interest rates on checking accounts has been on the Israeli agenda for several weeks now, following publications mid-May of the financial reports of the five largest banks in Israel — Bank Hapoalim, Israel Discount Bank, Mizrahi-Tefahot Bank, First International Bank of Israel and Bank Leumi — for the first quarter of 2023. The reports showed unprecedented profits of the five banks, of more than 6 billion Israeli shekels ($1.62 billion) combined, mainly due to a series of hikes in the interest rates on loans, announced by the Bank of Israel. These reports drew criticism on banks making huge profits, while refusing to share profits with checking account clients.
Following public criticism, Bank Leumi decided June 13 to offer some of its checking account clients with positive balances 1% interest. These clients include employees with salaries who pay mortgages, clients who use credit of more than 3,000 shekels ($812) per month, clients receiving pensions and employees with salaries who also hold investment portfolio. Other banks are said to be considering similar moves, Ynet noted.
On Tuesday, ahead of the expected vote, Yaron sent a letter to Netanyahu, objecting the bill initiative. “I am strongly opposed to intervention in the pricing of banking products and to setting a uniform price. Setting a price harms the activity of the market mechanisms, causes all the players to gather around the set price and thus suppresses competition and efficiency. It is globally considered negative and inappropriate for advanced economies in developed countries,” he wrote.
The governor argued that focusing the discussion on a single step in the checking account sector will not really benefit the clients. Furthermore, the decision of transferring responsibility for interest rates to the finance minister would harm the independence of the Bank of Israel, infringing on its ability to formulate monetary policies. “The violation of the central bank’s independence embodied in the bill crosses a real red line,” said Yaron, warning that this is how the international finance bodies and the international rating companies will perceive such a move.
Parallel to his appeal to Netanyahu, Yaron also urged banks to relay higher interest rates to customer accounts just as they have for mortgages and other loans. In response, Mizrahi-Tefahot Bank said it would offer 2% interest on checking accounts while decreasing interest rates on negative balances.
After Azoulay’s decision to postpone the voting of the bill, Yaron met in Jerusalem with Finance Minister Bezalel Smotrich and other senior Finance Ministry officials. He explained to Smotrich that he is in constant dialogue with the heads of the major banks over interest rates paid to clients, and that the positions of the banks keep evolving in a positive direction. According to Ynet, more banks could soon announce hikes in paid interest rates, and more banks are expected to make it easier on clients paying mortgages.
