1. Israel’s Capital Market Reform Bank of Israel and the IMF
Prof. Dan Galai
Sigma PCM and the Hebrew University
Feb

2. What Were the Objectives of the Reform?
*Lessening the dominance of the major banks.
*Enhancing competition.
*Reducing potential conflicts of interests
*Reducing operational costs to customers.
*Enhancing information flow

3. Efficiency-What does it mean?
Three meanings of efficiency:
*Allocation (Pareto)
*Information
*Operations
The trade-offs between classes of “efficiency”

4. How much Regulation is Optimal?
-Read Stigler’s Organization of Industry
His conclusion: at the end of the day regulators help the industry rather than the consumers. (e.g. the case of restrictions on investments in the QQQ).
-The “shadow price” of regulation.
-Not differentiating between more and less important issues.

5. “Hermon” as a Case Study
-The reform’s intention was to enhance competition.
-The incentives scheme to attract “stars”.
-Competition is on yields; risks are usually ignored.
-Managers assume more risks to achieve higher returns and maximize their incentives!
-How to align risks, returns and incentives?
-Where are the control systems?

6. On the Education of the Israeli Investor
*lacks the proper education
*is emotional about money
*believes in real estate
The Ostrich Effect
Can the Regulator be the Educator?

7. What should be done?
-Find the right balance between investors protection and competitiveness in the financial markets. Avoid “corner solutions”.
-More transparency
-More responsibilities on board of directors (e.g. the case of “Sharei Ribit”, or, “regulatory arbitrage”).
-Align the regulators and make regulation more uniform.