Reforms In Israel’s Banking System Launch of Prof. Meir Heth’s book, “Looking Back at Israel’s Banking System” Dr. Karnit Flug Governor of the Bank of Israel February 18,

Significant Increase in Nonbank Credit to Businesses, 12/99-11/15 2 NIS Billion Banks Foreign Lenders Tradable Corporate Bonds Nontradable Bonds and Nonbank Loans 10% 19% 22% 48% Source: Bank of Israel

3 Significant Increase in Household Credit, Provided Mostly by Banks Distribution of Non-housing Loans 3% 5% 9% 83% 1% 4% 95% NIS Billion Source: Bank of Israel

4 Development of Credit by Activity Segments, (Index: March 2011=100) Index Source: Bank of Israel. Mortgages Consumer loans Small businesses Corporate and commercial

Ratio of Consumer Credit to GDP in Israel is Relatively High Source: OECD, BEA, FED, BOE. % Credit to GDP,

Source: OECD Financing SMEs Entrepreneurs Share of Credit to SMEs in Israel out of Total Business Credit, 2013 Volume of Credit to SMEs in Israel is Similar to the OECD Average %

Net Interest Income (after Provision for Loan Losses), as a Share of the Average Balance of Assets and Liabilities, by Activity Segments, Source: Bank of Israel. Small businesses Corporate Commercial Households Private banking

Credit Card Interest Rates are Relatively Low 8 Loans & Overdrafts and Revolving Interest Rate for Households Overdrafts and Revolving Loans % % Source: ECB, FED.

Banks’ Profitability is Similar to OECD Average Source: Bank of Israel, IMF. Return on Assets (ROA) before Tax,

Fiscal Costs of Banking Crises as % of GDP SOURCE: IMF Working Paper – Systemic Banking Crises Database, June % 10

The Leverage Ratio (Basel III): Israeli Banks & EU, / Source: Bank of Israel. *EU1 includes banks with Tier 1 capital higher than 3 billion euro and internationally active (comparable to Poalim, Leumi, Discount). *EU2 includes banks with Tier 1 capital less than 3 billion euro or higher than 3 billion but not internationally active (comparable to rest of the banks). 11

Competition in the Israeli Credit Market  High level of competition in large businesses credit  High level of competition in mortgage market  Limited competition in SMEs and consumer credit, however: Significant increase in consumer loans and in credit to SMEs Development of nonbank entities Numerous measures and reforms have been implemented in this segment 12

The Bank of Israel’s Position Regarding Competition  Competition is critical for the existence of an efficient, advanced financial sector  The Bank of Israel is promoting competition in the banking system  Zaken Committee : (Simplifying the process of switching banks, opening and closing accounts and other activities via the Internet, creating a banking “identity card”, “fee tracks” and reducing fees, enhancing price transparency)  Setting up the Strum Committee: (Separating 2 credit card companies, technological platform for price comparisons, regulating nonbank entities and payment and settlement systems)  Establishing a Credit Data Register (Reducing information gaps to strengthen customers’ negotiating power)  Risk-adjusted supervision: More-lenient regulation for nonbank credit entities  Reducing barriers for adopting advanced technologies and encouraging processes to increase efficiency  Supporting competition that will benefit the public  It is possible to promote competition without adversely impacting stability  Competition without restrictions leads to excessive risk, deterioration in management and can negatively impact consumers  Therefore, there is great importance in adequate prudential and consumer supervision in the financial market 13

 The GFC teaches us that adversely impacting the financial system’s stability has long term consequences on employment, growth and welfare in general  The fact that Israel weathered the crisis relatively well emphasizes the need for professional and efficient supervision and illustrates the possible implications of not having such supervision  The Bank of Israel, the government and other regulators are responsible for the financial system's stability  Financial Stability Committee would be an appropriate framework for coordinating activity and monitoring risks and will make it easier to deal with those risks at an early stage 14 The Bank of Israel’s Position Regarding Stability

 The Bank of Israel is committed to ensuring that the public’s deposits in the banking system would remain safe during a financial or geopolitical crisis  Credit providers, which are financed through deposits or bonds issued to the public, and entities that settle most of the payments in the economy, have systemic importance and therefore are supervised by the Bank of Israel  The Bank of Israel, as other central banks, has the necessary knowledge and expertise and is the entity most capable of supervising systemically important financial institutions. Reducing the supervisory powers of the Bank of Israel in order to ease prudential supervision will create trends that are liable to pose a risk to the stability of the economy 15 The Bank of Israel’s Position Regarding Stability

16  Changes in the regulatory structure that will adversely impact the Bank of Israel’s ability to fulfill its role in preserving stability  Prohibiting large banks from issuing credit cards and extending a credit facility will negatively impact competition, reduce credit facilities, and lead to adverse impacts on consumers  Separating “Cal” (Israel Credit Cards) from the banks that own it will damage their ability to compete with the larger banks and would disproportionately harm those banks  Encouraging consumer credit at the expense of pension funds will adversely impact the public’s pension security The Bank of Israel Opposes Measures That do Not Benefit the Public

Conclusion: The Bank of Israel’s Stance  Competition can be increased in the financial intermediation market without adversely impacting the stability of the financial system.  The Bank of Israel will insist on maintaining its ability to continue supervising the credit providers and acquirers that have systemic importance  The Bank of Israel’s supervision will be adjusted to the supervised entity’s level of risk in a way that will support competition  Consumers’ protection must be ensured, according to uniform, high standards for the whole system  The Bank of Israel will strongly oppose steps that are liable to set the stage for the next crisis or to negatively impact consumers or financial stability  The continued implementation of measures initiated by the Bank of Israel, the creation of a central credit register and the promotion of measures for which a consensus has been achieved and which reflect the long-term welfare of consumers and the economy, will achieve significant improvements in the level of competition in the financial system 17

Thank You