Israel's Anti-Concentration Law, formally “A Law for Promotion of Competition and Reduction of Concentration”, is a law passed in December 2013 that seeks to reduce the size of existing large Israeli business groups organized in a pyramidal holding structures, separate financial holdings from non-financial holdings and prevent new pyramids from being formed.
The law was approved by Israel's Knesset with no objections and included both coalition and opposition parties: 42 coalition Knesset members and 30 opposition Knesset members voted for the law, an extremely rare result in the Knesset's history.
The Anti-Concentration Law is arguably the broadest-reaching economic policy measure taken by an Israeli government since the 1985 Israel Economic Stabilization Plan, which helped the country fight hyperinflation. In a January 7, 2014, New York Times article titled “Overhaul of Israel’s Economy Offers Lessons for United States” Steven Davidoff wrote that “with a single bill and a few big changes in its corporate law, Israel is looking to overhaul its economy and hopefully reduce income inequality”.Overhaul of Israel’s Economy Offers Lessons for United States. New York Times (January 7, 2014). Retrieved on 2016-12-12.
The law followed the creation of a committee, on October 24, 2010, whose final recommendations were handed in February 2012. The committee's work has taken a dramatic turn and accelerated considerably following the wave of social justice protests that swept Israel during the summer of 2011.
The issue of the concentration of economic power in few hands and its effect on competitiveness, prices, productivity, innovation and politics and lawmaking was campaigned for since 2008 by TheMarker, a leading Israeli business publication.
An October 15, 2015 article in Financial Times stated that: “…it is the role that the business newspaper TheMarker has played in Israel in exposing the effect on the national economy of the concentration of power and wealth in the hands of a few billionaires”.A strong press is best defence against crony capitalism. Financial Times (October 18, 2015). Retrieved on 2016-12-12.
In a March 23, 2015 article titled “How To Fix American Journalism” in The Nation, Michael Massing wrote: “… TheMarker, an Israeli financial newspaper distributed as a supplement to Haaretz, waged an unflagging campaign beginning in the mid-2000s against the extraordinary concentration of economic power in Israel and the dangers that this development posed to Israeli society and democracy. Led by its founding editor, Guy Rolnik, the paper ran periodic stories and columns that paid special attention to the ‘Israeli oligarchs,’ a small group of billionaires and their families who controlled much of the Israeli economy. When the campaign began, the subject of economic concentration was barely discussed in Israel. The stories fed growing outrage over inequality, leading to a series of mass demonstrations in 2011. Those protests, in turn, spurred the Knesset to pass a bill to break up the Israeli conglomerates. It was a remarkable display of how one news organization, through tenacious and unflinching reporting over a period of years, can help spur systemic change.”How To Fix American Journalism. The Nation (March 23, 2015). Retrieved on 2016-12-12.
Also, in a December 11, 2013, HaAyin HaShevi'it, an independent watchdog that focuses on the Israeli press, wrote that “For better or for worse, those who made concentration a major discussion topic are TheMarker, led by Rolnik. This is definitely an exceptional example, not only in Israel, of a media outlet that successfully employs an aggressive, but also creative and diverse, campaign to significantly influence the public discourse to the point of pushing for a law that is expected to lead to major changes in the economy’s structure.”בראייה היסטורית. HaAyin HaShevi'it (December 11, 2013, Hebrew). Retrieved on 2016-12-12.
Evidence of concentration In April 2008, Bank of Israel published a paper by research economist Konstantin Kosenko, “Evolution of Business Groups in Israel: Their Impact at the Level of the Firm and the Economy”, in which Kosenko wrote: “Using panel data on 650 public companies from 1995 to 2006, we identify twenty major business groups controlling about 160 listed companies and close to a half of total stock market capitalization, while the 10 largest groups' segment of the market capitalization is among the largest in the western world and amounts to 30 percent. These groups are family-controlled and highly diversified across different industries with common pyramidal structure of ownership: roughly 80 percent of all group-affiliated companies belong to business pyramids. Business groups are dominant especially in the financial sector, where half of banks and insurance companies are group-affiliated.”Evolution of Business Groups in Israel: Their Impact at the Level of the Firm and the Economy. Bank of Israel (April 16, 2008). Retrieved on 2016-12-12. A December, 2011 economic survey of Israel by the OECD mentioned this paper.OECD Economic Surveys: Israel . OECD (December, 2011). Retrieved on 2016-12-12.
In its annual report for 2009, Bank of Israel wrote: “Israel is one of the most concentrated developed countries and even resembles a developing country in this respect (Figure 2). Israel’s business groups are typified by broad sectoral dispersion, a significant tendency to focus on the financial sector, strong maturity of affiliated firms in terms of both age and size, slow growth, and higher levels of financial leverage—and therefore also of risk—among affiliated than among stand-alone companies.”Bank of Israel: The Financial System and Its Stability. Bank of Israel. Retrieved on 2016-12-12.
The report also stated that: “On the basis of the totality of findings about their activities, one may include Israel’s business groups among the entities that have the latent potential of systemic risk. This is because their activity satisfies two main criteria in the test of systemic risk: both their economic size and their complexity—in terms of concentration of control, ownership structure, and sectoral interrelations with financial and real institutions—create the probability of a spillover effect in the event of their failure, make it difficult to analyze information about their activity, and, in turn, make it hard to assess the risks of this activity and its relation with overall system stability.”
In its interim report, released on October 11, 2011, the committee concludes that the Israeli economy is concentrated, both in the real and financial sectors; that a few holding groups, that have a pyramidal holding structure, control disproportionally large portions of the Israeli economy; that these groups are typically active both in real and financial sectors; and that this structure creates a situation where they are competitors, suppliers and customers of each other.טיוטת המלצות הוועדה להגברת התחרותיות במשק. Israel’s Finance Ministry (October 11, 2011, Hebrew). Retrieved on 2016-12-12.
Pyramidal structure
The interim report concludes that the Israeli economy as concentrated: “a clear majority (88%) of Israeli publicly-traded companies are characterized by a concentrated holding structure, meaning they have at least one controlling shareholder. In more than a third of the companies, the controlling shareholder holds less than 50% of the capital. A majority of the market capitalization is held by business groups (68%). The prevalent holding structure within Israeli holding groups is pyramidal (in 79% of the groups the structure contains at least two layers of publicly-traded companies. Additionally, the average controlling premium in Israel is among the highest in the world.”
The report also identifies the most influential groups: “24 business groups control 136 (about 23%) publicly-traded companies out of 596 publicly-traded companies.” Focusing on the 10 biggest groups, the report finds that their holding rate is the highest among OECD members.
Financial and non-financial holdings
The interim report also concludes that “the Israeli financial sector is characterized by a very high degree of concentration, both relative to the economy’s concentration and to financial sectors in other countries: the five biggest banking groups hold about 99% of public deposits and the six biggest financial groups manage about 69% of the public’s long-term savings. As a result of regulatory demands, almost all Israeli financial entities in Israel have controlling shareholders, and some of the major financial entities have controlling shareholders that also have real holdings.”
The report than describes the close ties between the groups and their controlling shareholders: “Most business groups are active in a few markets, a fact that brings them together in various markets, whether as competitors, suppliers and each other’s customers.”
Concentration in the Israeli banking sector
For decades, banking is one of the most concentrated industries in Israel. According to Bank of Israel data, the combined share of two largest banks, Bank Hapoalim and Bank Leumi, in consumer credit is almost 70% of the total consumer credit of all five biggest banks."התפלגות תיק האשראי לציבור, ובפרט תיק האשראי הצרכני, בין הבנקים הגדולים לבין הבנקים הבינוניים, מארס 2014 עד דצמבר 2017". Bank of Israel (May, 2018, Hebrew, p. 100). Retrieved on 2018-11-8.
The banking sector was a major target of TheMarker's campaign against concentration. During 2017, TheMarker campaigned for the creation of a parliamentary inquiry committee to investigate the loans that the banks extended to top Israeli business people. In June 2017 the Knesset, Israel's parliament, voted on the creation of such a committee."אושרה ועדת החקירה הפרלמנטרית לאשראי הטייקונים". ynet (June 21, 2017, Hebrew). Retrieved on 2018-11-8. The committee's hearings are still ongoing.
During its late October 2018 sessions, the CEO of Bank Hapoalim and the Chairman of Bank Leumi made unexpectedly positive comments about the concentration committee and the ensuing law.,"הטעות של הח"כים - והאתרוגים הגדולים במדינה: 6 הערות על ועדת הטייקונים". TheMarker (October 22, 2018, Hebrew). Retrieved on 2018-11-8.“כך לא נראית מנהיגה: הבונקר המוזר של מנכ"לית לאומי”. TheMarker (October 28, 2018, Hebrew). Retrieved on 2018-11-8. These comments were surprising since in 2010 and 2011, while the notion of concentration was still debated, bank executives denied that there is a significant problem of concentration in the Israeli economy.
The inquiry committee itself offered an explanation as to how the cooperation between the banking system and concentrated businesses comes at the expense of consumers and dispersed public. Its economic advisers claim that the financial system provides superior credit terms to large, multi-layered, borrowers who use the resources to generate income by extracting rents rather than by activities that create wide benefit. The rent-extracting activities that were mentioned by the committee's advisers are concentration, stifling competition, influencing reforms and regulations and other activities that require power over decision makers."יועצי ועדת החקירה לא חוששים לדון במלה בת שלוש אותיות". TheMarker (November 3, 2018, Hebrew). Retrieved on 2018-11-8.
TheMarker has been pushing for banking sector reform in various occasions in the past too. TheMarker repeatedly pushed for the implementation of the recommendations of a 1985 inquiry committee (the “Bejski Commission”): to force banks to sell their asset management operations so as not to put them in a conflict of interests with their role as investment advisors. Eventually, in 2004 then-Finance Minister Benjamin Netanyahu appointed a new commission who reached similar recommendations that were adopted and implemented.