Israel's Knesset Removes Barrier to Lowering Credit Card Interest Rates

Credit card companies in Israel will soon be able to raise funds more cheaply, potentially leading to increased lending and lower interest rates for consumers and businesses. On Wednesday, October 14, the Knesset's finance committee approved an amendment that closes a legislative loophole created when credit card companies were separated from banks in 2017. This change is expected to allow companies to expand their credit offerings and reduce borrowing costs.

For companies like Max and Isracard, the savings are partly secured by existing agreements with investors. Max has approximately 400 million shekels in CoCo bonds, and Isracard has about 313 million shekels. Once the legislative obstacle is removed and these bonds are registered for exchange trading, their interest rates will automatically decrease by 0.25%. The amendment, initiated by the Ministry of Finance, is set to take effect immediately after being signed by the Finance Minister, which is anticipated in the coming days.

The change will also be relevant for Cal after its official separation from Discount Bank. The amendment addresses CoCo bonds, a specific type of bond used by financial organizations to build required capital reserves. Credit card companies, supervised by the Bank of Israel, must maintain these reserves, known as Tier 2 capital. The more credit a company intends to issue, the larger this reserve must be.

CoCo bonds have a unique feature: in a pre-defined severe crisis, the debt to investors can be partially or fully written off, or converted into shares, depending on the issuance terms. This structure allows investors to assume risk, thereby protecting the company from collapse and enabling regulators to count the raised funds as capital for lending expansion. However, a 2012 law designed to protect investors grants them the right to demand immediate repayment if the company's situation deteriorates. This conflicted with the purpose of CoCo bonds, which is to keep funds within the organization during a crisis to help it withstand losses.

While banks and insurance companies were granted an exception allowing them to issue exchange-traded CoCo bonds, credit card companies, as subsidiaries of banks before 2017, also benefited from this. Following the 2017 Law for Increasing Competition and Reducing Concentration in the Banking Market (Strum Law), which mandated their separation from banks, credit card companies gained a new legal status. However, the corresponding definition was not updated in the regulations, causing the previous exception to no longer apply to them. Consequently, they lost the ability to issue exchange-traded CoCo bonds and were forced to issue them without free circulation, leading institutional investors to demand higher interest rates and increasing financing costs.

Companies have been working with regulators to address this loophole for about 18 months since its discovery. The urgency to pass the amendment now, during the Knesset's recess, is linked to the finalization of organizational budgets for 2027. The approved change is expected to reduce creditors' expenses, increase available financing, and ultimately lead to more credit and lower rates for the public and businesses.