Supporting the orderly activity and stability of the financial markets

​The financial system occupies a central position in the economy; therefore, its efficiency and stability are essential for economic development and the realization of the economy's growth potential.

The financial system comprises three components:   

• Financial institutions, centering on the banking system and encompassing institutional investors (pension funds, insurance companies, provident funds, and supplementary education funds) and other financial entities (portfolio managers, underwriters, consultants, etc); 
• Financial markets: money market, foreign currency market, stock market, bond market, and derivatives market; 
• Payment and settlement systems.  

Responsibility for the stability of the banking system lies with the Banking Supervision Department of the Bank of Israel. Responsibility for the stability of the other financial institutions lies with the Commissioner of Capital Markets, Insurance and Savings at the Ministry of Finance, and the Securities Authority is responsible for the proper functioning of the securities market. Maintaining the stability of each of the separate components of the financial system does not itself ensure the stability of the whole system; an overall view of the system is needed. This is due to the increased sophistication of the financial markets, their close interdependence, the interrelations between the different types of financial institutions and between them and the financial markets, the complex dynamic processes within the financial system, and the instantaneous effects of external shocks on the system's components.   

The Research Department, in its capacity as monitor and promoter of financial stability acts to enhance the stability of Israel's financial system by:   

• encouraging reforms and changes in the infrastructure of the financial markets and financial institutions; 
• formulating policy recommendations in this sphere; 
• developing tools for the anticipation of threats to stability, the prevention of blows to stability, and responses to situations that undermine stability;  
• gathering and analyzing data and information about the financial system and constant monitoring of developments in it, focusing particularly on risks; 
• coordinating the actions of other supervisory authorities and entities; 
• representing the Bank of Israel in contacts with international organizations involved in the subject; 
• studying, researching, and disseminating knowledge of the subject; 
• publishing data, information, reviews, and studies on the subject.  

Regulation of Foreign Currency Trading and Publishing the Representative Exchange Rate  The Markets Department of the Bank of Israel monitors ongoing developments in the foreign currency market, analyzes them, and implements the Bank's exchange rate policy. Foreign currency trading takes place mainly between banks and their customers in Israel and abroad and among banks themselves. Today, the exchange rate policy is based on unrestrained fluctuation of the domestic currency against other currencies. However, the Bank reserves the right to intervene in foreign currency trading when necessary. In the early 1990s, foreign-currency control was gradually repealed in a liberalization process. Today, no control restrictions exist.   

Section 4(3) of the Law states that one of the functions of the Bank of Israel is "Supporting the orderly activity of the Foreign Currency market in Israel." In this capacity the Markets Department monitors market performance.   

On each foreign currency business day in Israel, the Bank of Israel publishes the representative exchange rate of the shekel against foreign currencies. The representative rate is based on the rate prevailing in the market at the time it is set. Importantly, the representative rate is an indicator of the exchange rate in use but has no obligatory status under law. Accordingly parties to transactions that are indexed to foreign currency may use any exchange rate on which they agree.