Watchdog slams unfair practices, orders greater transparency

Israel’s competition watchdog declares top 5 banks an oligopoly, targets deposits

Hapoalim, Leumi, Mizrahi Tefahot, Discount and First International control 98% of banking sector’s assets, competition watchdog says; critics denounce their huge profits, excessive fees

Israel’s competition watchdog on Wednesday declared the country’s five largest banks an oligopoly, citing their dominance in retail banking services for households and small businesses.

The declaration grants Israel Competition Authority Commissioner Michal Cohen the authority to impose directives or restrictions on their activities to encourage fair competition and prevent harm to consumers.

The decision follows a lengthy investigation, which opened in 2023, to examine the lack of competition in the banking sector. The regulator decided to target the savings deposit market and impose new mandates to force more competitive and fair interest rates for consumers.

Israel’s concentrated banking system is controlled by the country’s five largest banks – Bank Hapoalim, Bank Leumi, Israel Discount Bank, Mizrahi Tefahot Bank and First International Bank of Israel – which have allowed them to rake in record profits in recent years and charge excessive fees with little fear of blowback. The banks have been accused of generating excessive profits from higher interest rates on loans, while not adequately sharing the benefits with customers.

“The declaration of the banks as a concentration group is an important step in transferring bargaining power to the public,” Cohen said. “The directives that will be imposed are intended to stop the behavior of banks that make it difficult to compare prices of banking services and switch to competing banks and financial institutions.”

“The directives will make the basket of banking services more diversified and prevent harm to competition,” he added.

An oligopoly occurs when a few large players hold a combined share of more than 50 percent of a specific market, which typically results in reduced competition. As of the end of 2024, Israel’s five largest banks together control about 98% of the banking sector’s assets, with the two largest groups, Leumi and Hapoalim, together holding about 48% of all assets, according to the competition watchdog.

The Bank of Israel criticized the competition watchdog for declaring the top banks a concentration group as an “extreme and disproportionate step that, on the one hand, may deter investors from operating in Israel and, on the other, is not expected to increase the welfare of bank customers.”

The central bank said that some of the directives imposed on the banks by the watchdog overlap with its own efforts to increase competition in the banking sector by removing barriers.

The examination by the competition authority found that there is little competition among the banks for retail banking services offered to customers. In addition, there are barriers for customers to transfer deposits from one bank or financial institution to another. In addition, comparing prices between the baskets of services offered by different banks to households and small businesses was found to be “complex.”

Almost 90% of bank customers hold their deposits at the same lender as their main current account, according to the Israel Competition Authority.

“These difficulties result in low involvement of retail customers. Most of them do not frequently compare the terms offered by different banks and do not switch banks even when this is expected to benefit them,” the authority said.

“The banks benefit from limited competition in the retail sector, and this was reflected, among other things, in the increase in their deposit interest margins,” it added.

From mid-2022 to 2023, the Bank of Israel raised interest rates from 0.10% to 4.75%, allowing banks to sharply increase borrowing costs for mortgage and loan holders and boost income from net interest and credit fees. Since then, the central bank has lowered rates to 4%, but borrowing costs for households and businesses remain relatively high.

Despite benefiting from rising mortgage and lending rates, the country’s banks have been sluggish or have failed to raise savings and deposit rates for customers accordingly. As a result, consumers’ own deposits were generating only meager returns at rates a fraction of what the banks were charging.

Had Israel’s top banks raised interest paid on deposits as quickly as they increased rates on loans and mortgages, their profits from household deposits would have been about NIS 20 billion ($6.9 billion) lower in 2022–2024 — money that could have gone to households instead, the watchdog said.

The competition authority imposed binding directives on bank deposits, set to take effect on May 6, 2027.

One measure bans discrimination in deposit interest rates and requires full transparency between advertised and actual rates. The authority also criticized banks for refusing to offer standalone banking products to customers without current accounts.

A second directive requires banks to proactively contact customers near the deposit renewal date, present information about alternatives available to them and allow consumer-friendly transfers.

Banks will also be required to enable customers to make online transfers of deposits to another bank or financial entity conveniently, reliably, securely and without charging a fee.

“This is an important and necessary step, which we have called for repeatedly since 2017, and even more so in recent years, when the banks’ profits have reached hundreds of billions, at the expense of the customer,” said grassroots advocacy group Lobby 99. “In light of the dire lack of competition in the banking sector, the general public pays excessive fees and interest on basic banking services and, at the same time, does not enjoy fair interest rates on savings accounts and deposits.”

“The deposit sector is a good start, but we call on the competition authority to continue with all its might and impose regulations on additional segments, such as ​​loans and payment services,” Lobby 99 added.

Bank Hapoalim declined to comment. Leumi, Discount and Mizrahi Tefahot Bank were unavailable for comment.