A major battle is taking shape around Finance Minister Bezalel Smotrich’s announcement of a special, permanent tax to be imposed over the next five years on Israel’s largest banks. Tensions have flared over the past week, with the finance minister insisting on the levy while the banks, through the Banking Association, have declared an “uncompromising struggle, by all legal means, to thwart this bad decision.”
At the heart of the dispute is one central issue: the banks’ enormous profits, which reached about 30 billion shekels in 2025 and, according to forecasts, are expected to total around 34 billion shekels this year.
The key question is whether those profits grew because banks widened the interest rate spreads between what they charge and what they pay, or whether they actually narrowed those spreads, alongside a massive increase in the funds they manage and the dismissal of thousands of employees as part of efforts to streamline operations.
A senior banker illustrated the situation with a simple example: a clothing store sold several times more coats in the fall ahead of an unusually cold and stormy winter than it had the previous year. Prices were not raised at all, but because of the huge volume of coats sold, the store’s profits soared. Is it right, he asked, to punish the store’s owners for that?
Senior Finance Ministry officials and members of the team examining bank taxation offered a different view. They said interest income as a share of the banking system’s total assets rose significantly, particularly from the second quarter of 2022 onward, and even during the war. While bank fees declined, one senior Treasury official said that “the interest rates banks charge on loans compared with the near-zero rates that have steadily fallen over the past two years on deposits and current accounts amount to ugly, despicable behavior by banks toward a public that is at war.”
The official added that many customers who served hundreds of days in reserve duty over the past two years received only “crumbs” from the banks, largely in line with Bank of Israel directives. “Instead of going above and beyond for customers during this difficult period, the banks exploited the situation and simply ‘screwed’ their customers as much as they could,” he said, noting that customers had little ability to push back against what he described as a highly coordinated and well-oiled system.
So who is right?
There is no dispute on several points. The Bank of Israel’s policy rate is among the highest in the world, and the banks are the main beneficiaries. Interest rate spreads are indeed high, but — surprisingly — it was also presented to the special committee appointed by Smotrich, which is examining the tax he is eager to impose on the banks, that those spreads are not exceptional and are even lower than in many other countries.
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Bank Leumi CEO Hanan Friedman, Bank Hapoalim CEO Yadin Antebi, Israel Discount Bank CEO Avi Levi
(Photo: Israel Hadari, Inbal Marmari, Gil Nechushtan)
Another point is also clear: bank profits in Israel have grown by billions of shekels each year, including during the war. At the same time, as in the example of the clothing store that sold more coats, banks in 2025 managed tens of percent more funds than a decade earlier, while simultaneously laying off thousands of employees and closing many branches, developments that account for the huge profits.
About half of the committee’s members, mainly representatives of the Bank of Israel and the Finance Ministry’s Budget Department, strongly opposed imposing the tax, and the committee did not issue a clear-cut recommendation in favor of a new levy on the banks.
“There is concern that imposing a permanent tax on bank profits could indirectly harm the general public, since most bank shares are held by the public," one of the panel's participants said during a discussion. "A direct hit to bank profitability could lead to a decline in bank share prices, thereby harming pension savings and the public’s short-, medium- and long-term savings.”
“One of the concerns raised in the team’s work is that an additional tax on banks would ultimately be passed on to consumers, worsening their situation," another warned. "Thus, a move intended to reclaim banks’ excess profits and transfer them to the public could in practice end up harming the public itself.”
Participants also cited research by the Bank of Italy and the Bank for International Settlements, which found that taxing bank profits leads to higher interest rates on loans. “In other words,” the committee said, “banks do not absorb the loss caused by the increased tax burden themselves; most of it is passed on to consumers, who are ultimately harmed.”
The committee’s report also explained that “beyond the actual rolling of a higher corporate tax onto customers, raising the tax could also adversely affect the supply of credit, and thus the level of investment in the economy.”
The road to the High Court is paved
Competition Authority Commissioner Michal Cohen delivered sharp criticism of the banks over the weekend, saying their treatment of customers could justify tighter regulation and even “punitive” measures.
“We identify a very significant barrier preventing customers from switching between banks, because customers in this area are not engaged,” Cohen said. “They lack both the time and the ability to compare banking products. We have found that banks, through their conduct, encourage this lack of engagement. It suits them when the customer is dormant. They avoid price transparency, avoid offering simple products and tie products together, so that interest rates depend on holding a credit card, and the like.”
Cohen said she was considering issuing an order that would prohibit banks from discriminating between retail customers on deposit pricing and would require full transparency. “Everyone will know what they will receive at each bank and will be able to purchase a deposit from any bank. We are in the process of declaring the banks a concentrated group, which will allow us to impose directives that promote competition,” she said.
Banking Supervisor Daniel Hahiashvili spoke out forcefully against imposing a special tax on the banks. “Such a tax, as currently proposed, would work against the competition we are trying to create,” he said. “If the state wants to tax excess profitability, it should find a formula to calculate it and apply the tax across the board, to companies generally — not only to banks.”
Once Finance Ministry officials realized that imposing an excess-profits tax solely on banks — and not on other large corporations or monopolies — could be struck down by the High Court of Justice, the idea arose of extending the special tax to large companies that have sharply increased profits in recent years. “There are public companies with higher average returns,” officials said. Data presented to the team on this issue, however, were not addressed in the committee’s final report.
Ultimately, the special committee noted in its discussions on the proposed bank tax that “there are considerations supporting both sides of the question of whether to recommend imposing the tax, and therefore the committee recommends that the decision be brought before the political leadership.”
In practice, the committee did not reach any clear decision to impose a tax on the banks, and if one were to be imposed, it would be at a rate roughly half of the high rate announced by Smotrich — 15% on 50% of profits exceeding those of 2018–2022. The report clearly pointed to the negative consequences that could result from taxing the banks.
The major battle over the permanent special tax — planned, for now, through 2030 — that the finance minister intends to impose on the banks is only just beginning. It is expected to intensify in Knesset debates and at the High Court. In the meantime, banks will continue charging high interest on loans and paying relatively low interest on deposits, after all, profits must continue to flow next year as well.
And when a friend asked whether it was still worth holding bank shares, whose prices have fallen in recent days, an expert replied: instead of earning 34 billion shekels, the banks will earn 33 billion. The difference is so marginal that it makes no real difference to the long-term case for holding or not holding Israeli bank stocks.