A significant step toward promoting the entry of new players into the banking system: the Banking Supervision Department publishes a new Proper Conduct of Banking Business Directive, which deals with adjustments for small and new banks.

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The Banking Supervision Department today published a new Proper Conduct of Banking Business Directive, No. 490, on “Supervisory Framework for Small and New Banks.” The directive tailors regulatory and supervisory requirements to the scope of a banking corporation’s activities and its systemic importance, while maintaining the stability of the banking system, fairness toward customers, and the providing of adequate service.

The Banking Supervision Department today published a new Proper Conduct of Banking Business Directive, No. 490, on “Supervisory Framework for Small and New Banks.” The directive tailors regulatory and supervisory requirements to the scope of a banking corporation’s activities and its systemic importance, while maintaining the stability of the banking system, fairness toward customers, and the providing of adequate service. The directive was formulated following a legislative process aimed at enhancing competition in the retail banking sector, carried out in collaboration with the Ministry of Finance, and constitutes a significant step in the Bank of Israel’s efforts to removing barriers to entry and encouraging the entry of new players into the banking system.

Daniel Hahiashvili, Supervisor of Banks at the Bank of Israel, said: “The publication of the directive is significant news for the Israeli public and is expected to support the entry of new banks into the system, which will offer innovative products and services and contribute to increased competition in the banking system. The Banking Supervision Department will continue to promote a balanced regulatory environment that encourages competition and innovation in the banking system, alongside protecting depositors’ funds and safeguarding the stability of the banking system.”

The directive adopts a graduated supervisory approach in line with the Basel Committee’s principle of proportionality. It replaces Proper Conduct of Banking Business Directive No. 480, published in 2020, which addressed adjustments for a new banking corporation and a banking corporation in formation; expands the scope of the adjustments granted to date; and applies a broader and more comprehensive framework that will also apply to existing banks according to their characteristics.

 

The permanent supervisory tiers established under the directive:

Tier	Asset threshold	Transition to the next permanent tier
Permanent Tier 1	The bank’s total assets are up to NIS 15 billion	When the bank’s total assets reach NIS 15 billion, the Supervisor will consider granting the bank a transition period of up to two years before moving to Permanent Tier 2.
Permanent Tier 2	The bank’s total assets exceed NIS 15 billion and are below NIS 50 billion.	When the bank’s total assets reach NIS 50 billion, the Supervisor will consider granting the bank a transition period of up to two years before moving to Permanent Tier 3.
Permanent Tier 3	The bank’s total assets exceed NIS 50 billion.

 

In addition, the directive includes a preparatory phase for a newly licensed bank, to enable the gradual implementation of the regulatory requirements applicable to it, as detailed in the table below:

Phase	Applicable to	Operational limitations	Time limit
Preparatory phase for Permanent Tier 1	A corporation that has received a banking license and is expected to enter Permanent Tier 1.	The bank’s total assets are up to NIS 15 billion, and its total deposits are up to NIS 2 billion.	The phase will last up to three years. The Supervisor will consider extending the phase by up to an additional two years, provided that total deposits do not exceed NIS 5 billion.
Preparatory phase for Permanent Tier 2	A corporation that has received a banking license and is expected to enter Permanent Tier 2.	The bank’s total assets exceed NIS 15 billion and are below NIS 50 billion.	The phase will last up to three years. The Supervisor will consider extending the phase by up to an additional two years.

 

The directive establishes significant adjustments and regulatory relief for small and new banks across a range of areas, including in particular: capital and leverage requirements; liquidity requirements and their calculation methodology; limits on sectoral concentration and borrower size; the size and composition of the board of directors; the ability to consolidate functions within the organizational structure and rely on outsourcing; adjustments to risk management tools; and the ability to implement flexible business models suited to small banks and digital banks.

The publication of the directive is part of a broader series of measures advanced by the Bank of Israel in recent years to strengthen customer bargaining power, increase transparency, and remove switching barriers in the banking system. These measures include bank account portability (“Switch in a Click”), the promotion of open banking, support for the establishment of new banks, the creation of a credit data registry, and the publication of comparative interest-rate information on the “Equalizer” website.