The bank stock crisis was a financial crisis that occurred in Israel in 1983, during which the stocks of the four largest banks in Israel collapsed. In previous episodes of share price weakness, the banks bought back their own stocks, creating the appearance of constant demand for the stock, and artificially supporting their values. By October 1983, the banks no longer had the capital to buy back shares and to support the prices causing share prices to collapse. The Tel Aviv Stock Exchange closed for eighteen days beginning October 6, 1983 whilst a recovery plan was implemented and the banks were nationalized.
History
During the 1970s, Bank Hapoalim, and its manager, Yaakov Levinson, began attempting to control the bank's stock price on the Tel Aviv Stock Exchange by recommending to their customers that they invest in the bank's stocks by fraudulently providing guarantees that the prices of shares in the banks would rise indefinitely. These investments allowed the bank to increase its available capital for investments, loans, etc. The bank also gave out generous loans to allow the customers to continue their investments, also profiting from the interest.
Other banks joined the practice, called adjustments. Eventually all major banks manipulated their stock price this way, among them Bank Leumi, Discount Bank, Bank Igud, Bank HaMizrachi, and Bank Clali (General Bank, now U-Bank). The only prominent bank not to join the adjustments frenzy was First International Bank of Israel (FIBI).
The adjustments were performed through the use of other companies. For example, Bank Leumi used the "Jewish Colonial Trust Holdings and Development Company". The funding for these actions originated in loans from the bank's pension funds and similar sources. Sometimes the banks would practice mutual purchases – one bank would sell its stocks to a second bank, and buy the second bank's stocks for a similar sum.
Under pressure from the Israeli Securities and Exchange Commission, the banks reported the adjustments in their reports, but these reports were partial, misleading, and sometimes even false. Toward their clients the banks acted in a manner later described by the Bejski Commission as based on their own interests, ignoring the clients' interests.
The adjustments were made possible, in large part, by the banks' ownership structure. Bank Hapoalim was controlled by the Histadrut labor union's Workers Company (Hevrat HaOvdim), and Bank Leumi by the "Jewish Colonial Trust". The Hapoel HaMizrachi organization had almost none of Bank HaMizrachi's ordinary stocks, but all of its controlling shares. The owners' representatives were usually members of the ruling political parties (especially the Alignment, and the National Religious Party, or close to them). The banks' managers ran the banks for owners who understood little of banking and did not involve themselves in these actions. The fourth major bank to join this practice, Discount Bank, was different, insofar as management and control had not been ceded to outside managers.
Also contributing to the possibility of the adjustment was the capital structure of the Israeli market. During the years following the establishment of the State of Israel, the governments used the banks as a channel for procuring capital, and instructed them on how to invest their funds. This level of control, coupled with the control of interest rates, allowed the government to effectively "print money", by getting the banks to buy government bonds. Additionally, the banks usually assumed that since their investments and loans in major players of the Israeli market, such as the kibbutzim, were according to the government's wishes, the government would guarantee these loans.
Due to these reasons, the banks used the adjustments to issue more and more stocks, until, during the 1980s, bank stocks accounted for more than 90% of all issued shares on the stock market. They used the capital thus gained to give out loans and make investments. The banks also grew exponentially, building hundreds of new branches and hiring thousands of new employees.
The large banks got addicted to the easy capital, but this method soon became a trap. Like the government, fearing recession, the banks avoided any move to limit their expenses. They feared for the pockets and jobs of the managers, but also the fact that the first bank to make such a move would appear inferior compared to the other banks.