A major financial crisis occurred in Israel in 1983. The immediate symptom of the crisis was the crash of the Tel Aviv stock market; however, the cause of the stock market crash was the collapse of the share prices of Israeli banks traded on the Tel Aviv stock market. This research examines the Israeli financial crisis of 1983, along with the causes and outcomes of that crisis.
The banks in Israel became the public sector institutions by necessity and not by intention. With the exception of the First International Bank of Israel, the Israeli government, in 1983, rescued all of the country's large banks. This action by the Israeli government was necessitated when the disclosure of widespread share manipulation in publicly traded bank stocks caused bank stock prices in Israel to crash. The eventual cost to the Israeli government of the rescue of the banks has been estimated to range from a minimum of US$7 billion to as much as US$10 billion.
During the 1970s and the early-1980s, Israel's banks engaged in reckless lending practices. A high proportion of the volume of these loans went to Israel's collective farms, which the banks believed the government would never allow to fail. The banks, however, had to write-off approximately one-quarter of the loans made to kibbutzim and 20-percent of the loans to moshavim collective farms. Other high-risk loans, however, also were involved. As examples of the latter type loans, Bank Hapoalin had to write off some industrial loans, and Bank Leumi suffered losses on failed real estate loans in the United States. Bank Leumi had acquired these real estate loans through the acquisition of a branch bank network in the United States from Bankers Trust in the late-1970s. Bank Hapoalin has recovered better than have most Israeli banks since 1983.
Israel's banks are viewed by the Israeli government as instruments of public policy. At the conclusion of the 1983 rescue operation, t...