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Banking in Israel (by Raveh, Ravid & Co.)

 

Background

Banking in Israel is characterized by a highly centralized structure, centered on two major banks – Bank Leumi and Bank Hapoalim – alongside three smaller banks – Discount, Mizrachi Tefahot and the First International Bank of Israel. Besides these five, there are a number of other banks whose total weight in banking activity is much smaller.

The centralized structure involves significant risks of monopolistic market failures, including charging of heavy commissions to the public, and centralization of banking activity in channels where generating profit involves relatively small risks and efforts. This leads to the detriment of the banking activity that is aimed at financing business activities that involves a higher level of risk. In addition, the fact that some of the major banks are controlled by wealthy family groups, adds another tier to the problems lying in an oligopoly controlling core assets of economic activity.

In the last decade, many foreign banks have opened representative offices in Israel. However, none of them has started genuine retail commercial activity in the country, and most of them work on recruiting customers for the investment banking and private banking field. Thus the attempts to establish cooperative banks or other initiatives for refreshing and renewing the banking system have failed heretofore. The main reason for this lies in the heavy regulation employed in Israel and strict control of banks in the country.

Regulation and regulatory bodies

The regulation of banks constitutes a significant proportion of the activity of the central bank, the Bank of Israel. (The former governor of the bank, Prof. Stanley Fischer, serves at present as the Vice Chair of the U.S. Federal Reserve System.) The well-developed regulation, alongside effective control of the activity of the banks, is what eventually ensured the ability of Israel’s banking system to weather the devastating effects that the global banking system suffered during the 2008 crisis. Due to strictly enforced regulation, the banks in Israel abstained from extending unsecured credit and made sure that suitable reserves would be included in the various aspects of their activity. When such problematic credit was discovered, the banks had sufficient reserves to cope with it during this crisis, as well as during aftershocks that stemmed from it.

Despite all of these, some believe that Israel’s financial system has a major risk component, because the volume of credit that is given to households for financing residential mortgages has increased significantly, in a period in which prices have been soaring, due to the low interest rate (as in many other developed countries); the relatively high availability of money; and a factor that is unique to Israel – purchase of residential real estate by many Jewish foreign residents, who consider Israel to be a second home. This fear has been fueled by the view that once nominal interest increases, many households will be unable to repay their mortgages.