Israeli Banks Face Class Action Over Unpaid Interest on Checking Accounts

An Israeli district court has approved a class-action lawsuit against four major banks: Leumi, Mizrahi Tefahot, Discount, and International. The suit alleges that these banks have been using approximately 500 billion shekels in public funds held in checking accounts as a cheap source of financing without paying customers any interest. Judge Shmuel Bornstein ruled that while some claims were dismissed, the case has a reasonable chance of success on the grounds of unjust enrichment.

The judge's decision was significantly influenced by statements from Bank of Israel Governor Amir Yaron, who noted that banks' high profitability relies heavily on substantial public checking account balances, which serve as a cheap and stable funding source for banks but do not yield adequate returns for customers. The estimated damages to customers range from 3.6 billion to 5.1 billion shekels, according to economist Gilad Mano, who serves as the plaintiffs' expert witness. Mano stated that this damage continues to accumulate daily.

Since April 2022, the Bank of Israel has raised its interest rate from 0.1% to 4.75%. Mano explained that while banks readily increased interest rates on loans, they failed to adequately raise rates on deposits, leaving checking account interest at zero. This disparity, known as 'transmission,' means customers do not see incentives to save, undermining the Bank of Israel's monetary policy. Mano argued that the public's lack of financial literacy and a decade and a half of near-zero interest rates have led customers to accept this situation, while the oligopolistic nature of the banking sector prevents genuine competition.

Mano countered the banks' argument that paying interest on checking accounts would harm their stability, stating that increased profitability from higher interest rates could be shared with the public without jeopardizing financial stability. He proposed a minimum transmission rate, linked to the Bank of Israel's rate, rather than a fixed minimum interest rate, allowing for market competition above that floor. A May 2025 amendment to banking law requires banks to notify customers with checking account balances exceeding 15,000 shekels for a full quarter about investment alternatives, but it does not mandate paying interest or automatically transferring funds to interest-bearing accounts. The judge noted that since the legislature has addressed the issue, there is no basis to compel banks to pay interest on checking accounts going forward.

Mano dismissed the banks' claims that the lawsuit is a form of opportunistic litigation, asserting that the court recognized a public wrong and that the law permits citizens to represent the public when injustices occur. He added that incentivizing plaintiffs who bear legal risks and costs is appropriate when dealing with billions of shekels in alleged public exploitation. Mano confirmed that his calculations considered banks' operational costs, liquidity requirements, insurance, and supervision, concluding that even with these factors, banks could afford to pay reasonable interest on checking accounts, leaving them with healthy profit margins.