The Banking Supervision Department announces a regulatory easing expected to reduce the fee for a bank guarantee backed by a deposit

Households at times require a bank guarantee. One of the most common of such situations is the rental of an apartment, where the bank provides a guarantee to the landlord, for a case in which the tenants do not fulfill their obligations. In respect of the guarantee, the bank charges a fee, which reflects the operational cost the bank incurs in providing the guarantee—document preparation, legal examination, etc.—as well as the bank’s exposure to the risk that it will have to in fact utilize the guarantee, a risk against which the bank must tie up capital. Should the customer set a deposit against the guarantee, the bank’s risk is lower. As such, in 2013, the Supervisor of Banks directed banks that in respect of a guarantee against which a deposit was set, to price the fee with a lower cost than the fee charged for a guarantee without a deposit. Against this background, already today the fee in respect of a bank guarantee backed by a deposit is lower.

 

Examinations conducted by the Banking Supervision Department, among other things against the background of the public’s enquiries and an enquiry by Member of Knesset Yoav Kisch, indicate that the requirement for capital allocation is an obstacle to further reduction of the fee for a bank guarantee. After reviewing the issue, the Banking Supervision Department notified the banking system that banks may reduce the capital allocated against a bank guarantee secured by a financial deposit, under the stipulation that the bank can claim that it has the right to the deposit—that is, the bank assesses that it will be able to offset the deposit against the guarantee if necessary, even if the deposit is not legally encumbered to the bank. In a letter, it was clarified that the Banking Supervision Department expects that in light of the leniency, the fee in respect of a bank guarantee secured by a deposit will be markedly reduced.

 

The supervisor of Banks:

“The Banking Supervision Department constantly examines ways to makes things easier for bank customers, and deals in particular with atypical fees. We expect that following the step we announced, the banks will markedly reduce the fee for bank guarantees covered by a deposit, and thus there will be no need for further steps by the Banking Supervision Department to reduce this fee." ​

​​