Presentation (Hebrew)“Competition can be promoted without negatively impacting the stability of the banking system. The Banking Supervision Department and the Bank of Israel will do so—including advancing structural initiatives.”
The Supervisor of Banks today presented her approach to the expected changes in the banking and financial system in the coming years, and the plan by the Banking Supervision Department and the Bank of Israel to advance competition in the industry.
The following are her remarks.
In the coming years, big changes are expected in the banking and financial system in Israel, and worldwide, which will benefit customers in general, and household and small businesses in particular.
It is to be expected that in several years the banking and financial system will appear different—it will be more technological, and more competitive in areas related to households and small businesses, particularly in credit, in the payments area and in additional financial products. Furthermore, it may be expected that there will be some blurring of the boundaries between institutional investors, banks, and new participants in the system.
These changes are already occurring around the world, as a result of the technological changes that make it easier to enter the financial area and that create a more competitive environment, and due to the marked increase seen in recent years in regulation of banks, which is not the same as that of nonbank entities.
The Bank of Israel and the Banking Supervision Department will lead and support these changes, with our overriding goal being to protect consumers and to promote the good of the customer and the economy.
The recent global financial crisis, which began in 2007, led to many large and established banks entering bankruptcy in the US and Europe. Many were rescued by governments, using taxpayers’ money. The prices paid by the public in those economies were very large, and in some cases the payment is still being made today, seven years after the crisis began. This severe crisis proves that maintaining the stability of the banking and financial system is of paramount interest for the general public. Therefore, it is the top priority of the Banking Supervision Department.
However, maintaining stability does not preclude promoting competition. We believe that further changes in competition can be advanced without negatively impacting the system’s stability—and the Banking Supervision Department and Bank of Israel will do so, including promoting structural changes as well.
We intend to promote and support the following initiatives:
· Increasing competition in the household and small business sector, through several initiatives:
1. The Bank of Israel will lead the establishment of a credit database for use by the entire financial system. The information on a customer’s economic-financial conduct is a necessary condition for financial intermediation and development of competition, and therefore we ascribe the highest importance to the need to begin moving the project forward. A joint team is currently working on a bill regarding this issue, and at the Bank of Israel, staff work, incorporating most departments at the Bank, has already begun, ahead of the establishment of the database.
2. We will work to separate the credit card companies from banks whose share of retail credit is greater than 20 percent. This means that the two large banks will be required to sell the ownership of their credit card companies, and will be prohibited from working in the operating and acquiring of credit cards, though they will be able to continue issuing credit cards. In addition, we will support the separated companies being able to issue bonds to fund their operations, as they are under the supervision of the Banking Supervision Department. Supervision over the separated companies must remain at the Bank of Israel, as they are significant acquirers with economy-wide importance. The above noted process will support competition in two dimensions—nonbank competition, which will be strengthened by the two financial entities that will be separated from the banks, and competition from within the system itself, as it will strengthen, on a relative basis, the medium-sized banks that hold credit card companies and will not be required to sell them. We expect that those separated entities will expand the supply of retail credit and credit to small companies, and will contribute to competition in those areas, as well as to competition in the payment and settlement area. The Bank of Israel’s position on this issue, presented here for the first time, is the result of our comprehensive staff work, and we will promote it within the framework of the Strum Committee together with all the Ministries collaborating on the issue.
3. We will support the entry of institutional investors and nonbank entities to retail and small business credit through the purchase of loan portfolios from credit card companies and from the banks. The increasing resources of these entities will thus contribute to increasing the supply of credit and to reducing the price of credit to households and to small businesses. We have seen in recent years that the entry of institutional investors into corporate credit led to a very marked increase in competition in this area, and it may be expected that their entry into the retail credit sector is likely to have an even greater impact.
4. We will enable the banks’ entry into distribution of insurance products. The drive to increase competition, and the blurring of the boundaries between various financial sector participants, particularly when institutional investors and nonbank entities enter the household credit market, require the promotion of competition in all areas of finance. The banks’ entry into distribution of insurance to consumers, which is very prevalent worldwide, will lead to a decline in insurance prices, benefitting households, by using the banks’ widespread branch network. This recommendation was raised in the past by the Bachar Committee. We will promote the issue with the Commissioner of Capital Market and Insurance.
5. We will support technological changes worldwide in banking and finance—FinTech. In recent years, there has been a large-scale connection between the financial and technological worlds. This is technological innovation that allows the banking and financial system to increase efficiency as well as to create products customized to a customer’s needs. Likewise, technology reduces the barriers to entry to the financial sector and therefore will increase competition vis-à-vis the banking system.
· Increased stability and competition
6. We will work to define deposit insurance. Deposit insurance exists in nearly all Western countries, and after the global financial crisis, additional countries applied deposit insurance. There are many features of deposit insurance, and we must build a mechanism that is in line with Israel’s banking system, which is highly concentrated. Enacting deposit insurance will reduce the cost to the economy of a bank encountering difficulty or even failure, and will also contribute to the strengthening of the smaller banks. We will advance this issue with the Ministry of Finance.
I presented this plan in general terms. In each of the initiatives noted, the little details in the outline are very important. They are what will determine whether, and to what extent, the reforms will benefit households, small businesses, and the economy in general. Some of the small details have already been formulated in the staff work carried out by the Banking Supervision Department and the Bank of Israel, and some of them need further planning. We will work together with our partners at the Ministry of Finance and at other relevant authorities in order to define and advance these issues.
It is very important that all the factors in the economy prepare appropriately for the expected changes:
· Banks must continue to increase efficiency and to create competitive products for customers.
· Regulators must maintain and strengthen collaboration in order to create an overall supervisory framework, which will be in line with the changing financial world. There is also great importance, after these changes in finance and banking and the increase in shadow banking, in the economy being able to withstand the next financial crisis with as small a negative impact as possible.
· Households must verify that they are only taking out loans in line with their repayment ability. Today, credit is readily available to households, and will even increase when additional financial market participants enter this sector, so that responsibility is needed when taking out credit.
· Finally, it is very important that government entities assist households in terms of financial education. This is particularly the case in light of the technological changes that are occurring and that are expected, which are liable to be difficult for some populations segments. Banks also have a responsibility in this important area.
In conclusion, the stability of the banks and of the financial system is very important for protecting the public’s savings and for supporting economic activity. Alongside maintaining this stability, we will act to promote competition through structural changes. All this is with the goal of strengthening and advancing the good of the public, which is expected to benefit in several years from more advanced and more competitive services.