Bank of Israel calls to block bill requiring interest on checking accounts

The governor of the Bank of Israel, Amir Yaron, called on Prime Minister Benjamin Netanyahu to block a bill which would require banks to pay interest on the balance of checking accounts on Tuesday, according to Globes.

The bill, which was approved on Monday by the Ministerial Committee for Legislative Affairs, would have the banks be charged interest at a minimum rate determined by the governor of the Bank of Israel and the finance minister.

The bill is set to be brought for a preliminary reading in the Knesset on Wednesday.

"Setting a uniform price harms the activity of the market mechanisms; causes all the players to gather around the set price and suppresses competition and efficiency; raises significant implementation difficulties in regards to the way the price is calculated; and is seen internationally as a negative move that is not appropriate for advanced economies in developed countries," wrote Yaron in a letter to Netanyahu, according to Globes.

"I am afraid that this kind of blatant interference in legislation could affect not only international financial entities that are considering operating in Israel, but also international business entities in other areas of the economy. Focusing the discussion on a single step in the field of checking accounts, certainly when it is carried out while interfering with pricing, is not optimal for the customers."

Yaron additionally claimed that the legislation would harm the Bank of Israel's independence, as it would make the interest rate subject to the approval of the finance minister.

"In all, the finance minister is being given the authority to actually influence the interest rate in the economy and to blatantly interfere in the management of monetary policy and its effectiveness. The violation of the central bank's independence embodied in the bill is a real crossing of a red line and there is a real fear that it will be perceived as such by the international authorities and the rating companies."

"The main method to improve customer welfare is to continue removing barriers that prevent competition between the existing players and those that prevent the entry of new players," stressed Yaron.

Yaron also referenced a meeting he held with the CEOs of banks in Israel earlier this month in light of heavy profits made by the banks due to higher interest rates in the past year, according to the report.

In late May, the Competition Authority requested data from Israeli banks as part of an investigation launched in 2022, saying the banks were enjoying huge profits from higher interest rates on loans but weren't adequately sharing the benefits with customers.

The top five banks earned a combined profit of NIS 6.3 billion ($1.7 billion) in the first quarter.

Additionally in late May, the Bank of Israel raised the interest rate to 4.75%, the highest it has been since 2006. The spikes in interest rates have caused mortgage and loan payments to rise as well, creating extra expenses for citizens and extra profits for banks.

Israeli banks had general net profit of NIS 24 billion in 2022

The supervisor of banks at the Bank of Israel found that the general net profit of banks in Israel in 2022 was about NIS 24 billion, a 30% increase compared to the year before. The increase was mostly due to an increase in interest income affected by the increase in the consumer price index and the increase of interest rates by the Bank of Israel.

The banks' income from interest in 2022 was NIS 72 billion, while interest expenses sat at NIS 22 billion, meaning its net income from interest reached NIS 50 billion, a 33% increase compared to the year before.

While the income from interest was offset by the interest expenses, which nearly tripled compared to the previous year, the supervisor of the banks found that the increase in expenses was still lower than the increase in income.