Concentration in the Israeli Economy and Bank Investment in Nonfinancial Companies
Posted: 5 Sep 1997
Date Written: January 1997
In Israel, as in a number of other economies, a few large banks have historically played a major role in the nonfinancial sector. At the end of 1995, the Israeli government appointed the Brodet Committee to examine bank investments in nonfinancial corporations. The Israeli Knesset subsequently adopted the committee's recommendations and imposed major limitations on the role of banks in the nonfinancial sector. These limitations required the two biggest Israeli banks to start selling much of their nonfinancial investments.This paper is based on the research report that we prepared for the Brodet Committee at the request of the Israeli Finance Ministry and Antitrust Authority. We explain why we recommended to the Committee that substantial limitations be imposed on bank investment in nonfinancial companies. We provide a detailed analysis of the effects that bank- conglomerate combinations have in a small economy -- such as Israel's -- that is characterized by a great deal of concentration in both the financial and nonfinancial sectors. In particular, we analyze the effects that bank-conglomerate combinations have on the safety and soundness of banks, on the decisions of the investment funds managed by banks, and on the level of competition in the economy in both the short run and the long run.
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