Israeli Investors Weigh Bank Diversification Amidst Financial Uncertainty
As financial uncertainty rises, Israelis with significant savings, ranging from one to ten million shekels, are questioning the wisdom of consolidating all their assets in a single financial institution. While intuition suggests diversification is prudent, the practicalities involve real costs in fees, reduced bargaining power, and operational headaches. The key distinction, often overlooked, lies in the legal nature of different financial holdings.
Deposits and checking accounts represent loans to the bank, with recourse solely dependent on the bank's stability. Unlike the US and EU, Israel lacks formal deposit insurance legislation. Conversely, securities like stocks, bonds, and mutual funds purchased through a bank are registered in the investor's name and held separately from the bank's assets. In the event of a brokerage firm's collapse, these securities remain the investor's property and are transferred to another firm.
The primary institutional risk, therefore, is concentrated in deposits and checking accounts, not investment portfolios. While the Israeli banking system is robust, highly regulated, and profitable, with a strong history of government support for depositors, risks like prolonged technical failures, cyberattacks, or erroneous account freezes, though rare, necessitate contingency planning. Having an active account at a second institution can ensure access to funds and continued operation of services during such events.
The optimal number of institutions depends on the amount saved. For sums up to one million shekels, diversification is often unnecessary; maintaining a primary account, prioritizing securities over large deposits (e.g., money market funds instead of substantial fixed deposits), and perhaps a basic backup account with a low-cost digital bank for operational continuity is sufficient. For savings between one and three million shekels, a common structure involves a main bank for daily operations and deposits, and an external brokerage or a second bank for investment portfolios, which also enhances negotiation leverage.
For holdings exceeding five to ten million shekels, expanding to three institutions or even including an account with a regulated global broker abroad can provide geographical and currency diversification, albeit with added tax complexities. However, excessive diversification incurs annual costs, including duplicated minimum fees, account management charges, and diminished bargaining power. Consolidating three million shekels in one institution can unlock private banking services and better interest rates, whereas spreading smaller amounts across multiple institutions may result in being treated as a mid-tier client everywhere. Managing multiple online portals, passwords, and oversight also adds to the burden.
The guiding principle is that diversification should serve the investor, with the right dosage being crucial. Mapping assets by type, distinguishing between institutional exposure (deposits/checking) and lower-risk securities, is the first step. A practical rule is to cap individual institutional deposits and checking accounts at a comfortable level, such as one million shekels, moving the excess into stable securities or a separate institution. Ensuring both spouses are authorized on all accounts, maintaining an active card from each institution, and keeping a consolidated document of all accounts for family reference are essential practical measures. Annual review of the financial structure against the portfolio's size is also recommended.
Splitting funds across multiple accounts or products within the same bank offers only the illusion of diversification; the true measure is at the corporate level. To reduce institutional exposure, funds must be moved to a different corporate entity or into securities. Conversely, a money market fund purchased through a bank is held by a separate trustee, with its assets segregated from both the fund manager and the bank, making it an effective diversification tool even within the same banking group. Finally, concentrating all assets and liabilities with one bank grants it significant leverage; separating mortgage providers from savings institutions can restore bargaining power to the consumer.
