Document Type

Case Study


From 1980 to 1983, Israeli consumer prices more than doubled every year and the shekel lost more than 50% of its value annually. This high inflation and currency devaluation posed an extraordinary challenge for Israel’s biggest banks. They needed to grow their capital bases to keep up with the rising market value of their assets, but investors needed protection against the continually declining value of the local currency. Banks’ solution was to regularly issue new, nonvoting shares in extraordinary amounts while ensuring investors a high return by regularly buying their own shares to manipulate prices. The government tacitly supported the policy, which helped it finance its deficits, and the central bank for years considered bank shares to be liquid assets because of the banks’ “regulating” activity. In 1983, this system-wide manipulation finally proved unsustainable when investors turned to foreign currency deposits and sold their bank shares in amounts larger than the banks could continue to buy. On October 6, 1983, after several weeks of heavy selling by Israeli bank shareholders, the Tel Aviv Stock Exchange (TASE) closed for 18 days. During the closure, the government and the controlling stakeholders of seven of the eight largest banking companies in Israel, representing 90% of the banking system, worked out a scheme to delist shares from the TASE, commit the government to bail out shareholders in the future, and end share price manipulation, while keeping banks’ management broadly the same as precrisis. Through 1991, the government purchased shares at precrisis prices, costing $9.2 billion, or 22% of 1983 GDP.