Israeli Banks Face Landmark $4 Billion Lawsuit Over Interest on Checking Accounts

A significant class-action lawsuit seeking 15 billion shekels (approximately $4 billion USD) against four major Israeli banks has been approved by a court, potentially reshaping how banks handle customer deposits. The lawsuit alleges that banks, including Leumi, Mizrahi Tefahot, Discount, and International Bank, failed to pay adequate interest on customer checking account balances during a period of sharply rising interest rates.

Between April 2022 and May 2023, Israel's central bank interest rate surged from 0.1% to 4.75%. While this move aimed to curb inflation, it also highlighted what critics call a consumer "distortion," where banks profited immensely from customer deposits without passing on a fair share of the interest earned. For every 10,000 shekels in a checking account, banks reportedly earned 430 shekels while paying out only 10 shekels in interest.

The lawsuit, approved by the Central District Court in Lod, centers on the legal principle of "unjust enrichment." It demands that the banks compensate customers for the missing interest on their checking account balances over a three-year period, from April 2022 to May 2025. This ruling is considered unprecedented, challenging the core business model of these financial institutions and adding to recent regulatory pressures, such as being declared a concentration group by the Competition Authority.

Bank Leumi, holding the largest share of checking account funds among the four banks (around 42%), faces a theoretical exposure of approximately 6 billion shekels. Mizrahi Tefahot (24%), Discount (19%), and International Bank (15%) also have significant potential liabilities. A separate, similar lawsuit is ongoing against Bank Hapoalim.

While the court's decision is a major victory for consumers, its immediate financial impact on the banks' balance sheets is uncertain, as they may not be required to make provisions until the case progresses further. The potential beneficiaries are broad, with eligibility criteria including customers with balances of 3,000 shekels or more for at least one business day, or 1,000 shekels for three days or more, within the specified period. However, the bulk of the potential compensation is expected to go to wealthier customers with substantial balances, though some may be financially unsophisticated individuals whose savings are tied up in these accounts.

Looking ahead, the banks are expected to appeal to the Supreme Court. Legal experts suggest that if the ruling stands, it could lead to significant changes in banking practices, potentially forcing banks to offer fairer interest rates or more accessible automatic fund-shifting mechanisms. Conversely, there's a concern that banks might pass on these costs to consumers through higher loan rates or increased fees, creating a "boomerang effect."