Regulatory relief for new banks

Background

The Banking Supervision Department today is publishing, for public comment, drafts of new directives dealing with adjustments made to Supervisor of Banks directives that will apply to new banks and to banks in the formation stage.

 

Alongside the main goals of maintaining the stability of the banking system and strengthening the public’s trust, the Banking Supervision Department set for itself an additional goal—encouraging competition in the banking system for the benefit of the banking consumer.

 

The Banking Supervision Department has adopted numerous and varied steps in recent years to achieve this goal, among other things by removing barriers to entry to the banking sector and accompanying new entities interested in establishing a new bank.

 

Supervisor of Banks Dr. Hedva Ber said, “In order to encourage the establishment of new banks, we acted to simplify the process of receiving a bank license and to create regulatory certainty for the license applicant from an early stage of the process. Today we are publishing for public comments a draft of new directives, which deal with regulatory relief to Banking Supervision Department directives that will apply to a bank in formation and to a new bank, as an additional step in creating a regulatory environment that supports the establishment of new banks, which will be lenient on them in the first years of their establishment, until they are entrenched. Thus, we are implementing the principles of risk-based supervision and carrying out processes that are similar to those of leading regulators worldwide, such as the UK and Australian regulators. These directives are an additional tool in removing barriers to the establishment of new banks in Israel.”

 

In June 2018, the Banking Supervision Department published a policy document on the issue of the process for establishing a new bank, and guidelines for bank license applicants.[1] The policy enables a bank in formation to receive a license that is limited in time and in activity, as part of which the bank is able to carry out very limited activity, until it completes its preparations. After completing its preparations, the bank becomes a “new bank”, holding a bank license that is not limited in time, but is limited in activity. The publication led to interest being expressed by various entrepreneurs.

 

Following the June 2018 publication, the Banking Supervision Department today is publishing 2 drafts of new directives:

 

a.       A draft Proper Conduct of Banking Business Directive that will apply to new banks: at the stage they are considered a “bank in formation” and at the stage they are considered a “new bank”.

b.      A draft Reporting to the Public Directive for a “new banking corporation”.

 

The drafts will be published as final directives after receiving comments and references to them, including consultation with the committee advising the Banking Supervision Department, with entrepreneurs who contacted the Bank, and with the general public, and completion of the discussions.

 

In Israel, the banking regulation is generally suited to the existing banks, which have medium to very large scopes of activity, with medium/high complexity of activity. Without establishing incremental regulation for new banks, they would have had to comply within a short period of time with all the requirements existing in Supervisor of Banks directives, without any correlation between the requirements and their complexity and scope of activity.

 

The new directives create a supervisory level that is defined and known to the establishers of a new bank in terms of the supervisory requirements applicable to such corporations. In addition, they define the requirements that will apply to a “bank in formation”.

 

 

What is a bank in formation?

 

A corporation that received a limited bank license, given for a period of up to 3 years, during which time it is to complete its preparation, including raising capital, filling the positions on the board of directors and senior management, hiring employees, and developing and entrenching the operational infrastructures and systems. During this period, the bank can execute banking transactions that are not complex—activity vis-à-vis private individuals and small companies, without activity abroad, and at very restricted scopes, up to NIS 250 million in credit to the public and up to NIS 250 million in deposits from the public.

 

What is a new bank?

 

A new bank is one that meets all the following definitions:

 

  •        It received from the Bank of Israel a bank license that is not a limited license
  •        It conducts a low scope of activity—its total assets do not exceed 1 percent of total assets of the banking system or do not exceed NIS 16 billion (the lower of the two), and its total deposits from the public do not exceed 0.5 percent of the total banking system’s deposits from the public or do not exceed NIS 6 billion (the lower of the two).
  •        It is characterized by activity that is not complex.

 

In general, as long as a new bank complies with the quantitative thresholds and is characterized by simple activity, the directives shall apply to it, regardless of the number of years that have elapsed since its establishment. A new bank that has grown and its activity has expanded beyond the quantitative thresholds that define a low scope of activity, shall be given a transition period of up to 3 years to implement part or all of the directives that apply to medium sized or large banks.

 

The transfer from a “bank in formation” license to a “new bank” license is not automatic, but is dependent on receiving the approval of the Governor that the bank in formation has completed its preparation as required.

 

Incremental (proportional) regulation and why it is implemented regarding new banks

The transfer to incremental regulation is a widespread trend among banking regulators in leading countries. This trend is the result of the tightening regulation since the global financial crisis that broke out in 2008, which was expressed, among other things, in increased capital and liquidity requirements, added requirements of collaterals in derivatives activity, and strengthening of corporate governance and risk management at banks. While this trend acted to strengthen the banking system’s stability, it also led to increased costs, particularly for small and medium sized banks, and to reducing the incentives to establish new banks. Thus, leading regulators around the world began to examine and even to implement incremental regulation. Examples of incremental banking regulation can be seen in the US, Switzerland, and the EU. It should be emphasized that the goal of the incremental regulation is to align the regulatory burden with the various levels of risk among the banks.

 

 ​

The requirement

How it applies to an existing bank

How it applies to a bank in formation

How it will apply to a new bank

Capital adequacy ratio

Common Equity Tier 1 Capital Ratio

 

Total Capital Ratio

 ​​

 

 

Minimum ratio of 9%

 

 

Minimum ratio of 12.5%

Minimum capital of NIS 30 million

When total risk weighted assets>NIS 600 million:

Minimum ratio of 8%

Minimum ratio of 11.5%

 

When total risk weighted assetsNIS 600 million:

Capital is not to be less than NIS 50 million

Leverage Ratio

Minimum ratio of 5%

-

Minimum ratio of 4%

Liquidity Ratio

Liquidity Coverage Ratio is not to be less than 100%

Liquid assets at 20% of total deposits raised from the public

Liquidity Ratio calculated via the simple method as a function of the public’s deposits and their duration

Board of Directors

·         Minimum board members: 7

·         Minimum number of board members with “banking experience”: 1/3 of the board

·         Minimum number of board members with “expertise in accounting or finance”: 1/5 of the board

·         The controlling party or relative thereof cannot serve as Chair of the board of directors or as Chair of a board of directors committee

·         Required committees of the board: Audit committee, Compensation committee, Risk management committee, IT and innovation issues committee

·         Minimum board members: 5

·         Minimum number of board members with “expertise in accounting or finance”: 1

·         The controlling party or relative can serve as Chair of the board of directors or as Chair of a board of directors committee (except for the Audit committee)

·         Required committees of the board: Audit committee

·         Minimum board members: 5

·         Minimum number of board members with “banking experience”: 1 or 2, depends on size of the board

·         Minimum number of board members with “expertise in accounting or finance”: 1

·         The controlling party or relative can serve as Chair of the board of directors or as Chair of a board of directors committee (except for the Audit committee) for a period of 3 years from the date a permanent license is received

·         Required committees of the board: Audit committee

Cloud computing

Cloud computing services may not be used for core activities and/or systems

Cloud computing services may be used for core activities and/or systems, subject to the approval of the Supervisor of Banks

Cloud computing services may be used for core activities and/or systems, subject to the approval of the Supervisor of Banks

Senior Management and risk and control functions

Various directives require the appointment of various officeholders as managers of areas, risks, or controls

A risk-management function is required, one that is independent of the business lines and also an internal auditor (in line with scope and essence of activity)

The requirements for appointing various officeholders as managers of areas, risks, or controls were reduced by combining functions or giving the option of outsourcing specific actions of main functions

Publication of financial statements to the public

Quarterly reporting frequency

-

Semiannual reporting frequency