I am very excited to be here today at this honored conference, to share my respect for the work of Prof. Meir Heth and on the occasion of the publication of his autobiography, “The way it was”.
They say that you only give a person a little praise in his presence, and all of the praise when he is not present. So since Prof. Heth is with us here today, and he is a man with many accomplishments and achievements, I will try with your permission to focus on his period as the Supervisor of Banks by way of looking in a nutshell at the work of the Supervisor today.
Prof. Heth was the third Supervisor of Banks, and to a certain extent, he built and developed the Banking Supervision Department as we know it today. By the way, every day when I leave the office, I see his picture hanging on the wall alongside the others who have held this important and challenging position. Some of the processes, units, and products that were set during his time in the position are still with us today. For instance, in his book, Prof. Heth describes how the chapter in the Bank of Israel Annual Report that describes the development of the banking industry was quite small. As such, starting in 1972, the Banking Supervision Department has published a broad and comprehensive report of its own on the activity of the banking system. In the next month, we will publish the review for 2021, and next year, we will mark the 50th Review of Israel’s Banking System. This is just one example of what Prof. Heth did during his term as Supervisor of Banks, which have left their mark on the Banking Supervision Department, the Bank of Israel, and the entire banking system until today.
Despite the fact that Prof. Heth was the third Supervisor of Banks and I am the thirteenth, I cannot help but identify with a number of issues that were placed on his desk and that are on my desk today as well. Unfortunately, some of them really have not changed in all that time. It would be sufficient to mention as an illustrative example the issue of deposit insurance. In contrast, there are certainly new and challenging issues that we are dealing with today that were once not relevant. I assume that Prof. Heth would not have needed to hold many meetings on issues such as payment applications, electronic wallets, cyber risks, cryptocurrencies, and so forth.
In the coming minutes, I will try to discuss a number of issues that illustrate the similarities and the differences between the Supervisor of Banks’s work then and now.
Prof. Heth dealt a lot with the advancement of advanced legislative infrastructure in the field of banking, and saw the importance of a complete and advanced legislative infrastructure for the development of a healthy and developed banking industry in the Israeli economy. The challenge in advancing legislative processes that was the lot of the third Supervisor of Banks has remained at some level over the years, and even during my tenure it is one of the most significant challenges.
First, the lack of success in legislating an advanced banking law, as described in the book, has an impact on the banking system and on financial supervision to this day. Today as well, we sometimes have great difficulty making changes to existing legislation, despite the fact that some of it is very, very old and not necessarily in line with the business environment or the nature of activity. Just recently there were people who told us that the banks could not provide services in cryptocurrencies, because this was not explicitly mentioned in the list of approved services in the Banking (Licensing) Law from 1981. We are certainly maneuvering between attempts to provide interpretations that are in line with the aim of the legislation together with the changing characteristics of the business environment, while at the same time initiating new legislation that also comes with challenges and costs. This is especially challenging since we are not a legislative body.
Alongside this, the banking industry is currently characterized by revolutionary trends, as opposed to the evolutionary trends that generally typify large systems such as the banking system. The revolutionary aspects of opening the market to competition, off-loading products and services, monetizing information, and the entry of technological firms to the evolutionary world of finance require infrastructure and legal interpretation that support and enable the development of this world. We can certainly say that we are not at the equilibrium that enables this, and we can even think that this isa natural state that we can attain.
It is certainly possible that the main difference between the supervisory periods of then and now are focused on the pace and range of the changes, some of which I will discuss in brief in these remarks as supervisory challenges on our desk.
From the legislative challenges, we move to the importance of providing proper banking service and business and functional continuity processes that will ensure the proper level of service even during emergency situations and stress incidents. The importance of business continuity was clear then, and it is even more clear to us now. The events and scenarios have perhaps changed, but the nature remains similar. During Prof. Heth’s term, the banking system showed impressive improvisational capability when it had to deal with a very difficult mass callup due to the Yom Kippur War. It was difficult to staff the branches, measures were taken to defer payments on loans, and credit facilities were expanded for companies. I took office as Supervisor in May 2020, on the day we exited the first lockdown (we didn’t know then that it was just the first). During the COVID-19 period, slightly similar to the Yom Kippur War period, the banking system dealt with a lack of employees to provide services, worked to delay loan repayments on an unprecedented scale, and had to work hard to continue providing proper services to customers, despite the restrictions and the difficulties. It’s true that at the beginning of the 1970s the material capability to provide digital services did not exist, whereas today, more than 80 percent of households’ banking activity is done digitally. It is worth emphasizing that in the past two years, there was a significant jump in the use of such channels, as well as in financial and digital literacy of population
Groups that had heretofore stayed away from it until the outbreak of COVID-19.
Even in Prof. Heth’s days, the Banking Supervision Department dealth with a series of mergers between banking institutions. At the time, the Bank of Israel and the government even provided loans with convenient terms with the aim of encouraging and enabling such mergers. There is no doubt that the banking industry then was very different than what we know today, with a large number of banking institutions, some of which were specialist institutions with smaller volumes of activity. A large portion of the mergers were made due to the marginal strength of some of the banks. It’s funny that one of the first tasks that Prof. Heth had to deal with was the merger of Bank Mizrachi with Bank Hapoel Hamizrachi. Anecdotally, from the time I took the position, I have been working on the merger of Bank Mizrachi as well, this time with Union Bank. In recent years, we have seen a trend of mergers and acquisitions among the banks both in Israel and globally. This trend is generally in decline in view of the fall of banks and more so in view of the advantage of scale that is built into the banking industry alongside the business, regulatory, technological, and other challenges that expose the disadvantage of small size for the banks prior to the merger. In the current era of immense investments in information systems, model development, information security and cyber risk, the importance of the advantages of scale come into sharper focus. The trend of banking consolidation is very prominent in the American banking market, where it has become a real phenomenon.
It is worth nothing that I have been somewhat amused to read the description in the book of how Prime Minister Golda Meir asked whether there was any exaggeration in the number of new bank branches being opened in those years. Today, as I have noted, more than 80 percent of all household banking activity is done through direct and digital channels, which both explains and is accompanied by the closure of branches—something that of itself arouses a lot of public criticism. For the past few years, we have had to examine each request to close a branch, and in many cases we have made demands and imposed conditions before approving closures.
What was true then and is true now is that there is broad and lively public discourse regarding supervisory activity, which is often accompanied by criticism. I see this as something positive and important. We are attentive to the public discourse, we learn from it, and we even improve because of it. The circumstances, reasons, and means of the criticism are obviously somewhat different. Today, the digitization of the social networks and the pace of development of things are challenging and necessitate an immediate reaction.
I mentioned technology on purpose. There is no doubt that this is a field where we can sense the significant difference between banking supervision of the early 1970s and banking supervision today. The banking system today uses advanced technology in order to manage activity, as well as in order to provide advanced and efficient services to its customers, who today conduct most activity through direct and digital channels and not through the traditional service channels such as the branch or call center. These types of usage make it necessary to implement best practices in managing technological, information security, outsourcing, and cyber risks. The banks’ management of these risks is no less important, and sometimes even more important, than managing traditional risks such as credit, interest, and market risks. In order that we not ignore the technological challenge, we emphasize the traditional banks’ integrated activity between the core banking systems—the ones that have been serving the system in recent decades—and the end systems—the ones supporting customer applications, that require modernity, speed, flexibility, agility, and the system’s ability to operate in the cloud.
All of these make it necessary for the Banking Supervision Department to continue adapting its own activity, as well as its supervisory activity, whether through regulation or assessment, examination, and enforcement. It is worth emphasizing that the Banking Supervision Department is assimilating information systems that absorb tens of millions of data each year from the banking system, which comprise a significant element in monitoring and tracking the activity of the banking corporations and estimating the risks to which they are exposed.
On this honored occasion, I feel it is my obligation and my honor to say a few words about the changes and challenges in the banking environment at this time. Of course, these statements should not indicate that there was no action or focus on these issues at other times.
The business model risk and the changing competitive environment: This is both a risk and an opportunity accompanying a revolution. Technology and digitization can remove barriers. The development of fintech terms and the tremendous importance of big-tech platforms are creating a new playing field, which makes it necessary to examine the variety of financing sources, cooperative ventures, off-loading of services and products, and more.
Fairness and public trust: We are investing a lot in this issue, in view of its importance to the customer and to the business system. We have developed a methodology for measuring fairness. We are working hard to make products more accessible and simple. The provision of high-quality service in all channels and contacts, and the prevention of discrimination in products and services and creation of value of the customer.
I have discussed the world of technology at length. In this respect it is also important to note the world of information. We are in an era where power is moving to the customer, and it is clear that banking information is an asset held by the customer. The open banking reform is a significant reform that can essentially leverage information to the customer’s benefit by transferring it to a third party with the customer’s consent. This leverage can create the off-loading of products and services, as well as lead to a change in consumer habits and characteristics. We are at the start of this revolution that is creating many opportunities alongside challenges. The issues facing us today are: What does customer consent mean? To what is the customer consenting? What is permitted use? The uses accompanying the use of information; the ability to develop models on the basis of the information; information security risks; privacy protection; and more.
We must give the proper emphasis and attention to financial risks and the development of other risks. These obviously exist at all times, but they change and develop based on the global economic environment. Today, we must discuss the economic impact of the COVID-19 virus, and the crisis in Ukraine that is expected to have short- and long-term economic impacts. It has even become customary recently to ask whether that crisis is leading to the end of globalization. After many years of very low inflation and interest rates, we are seeing an increase in the inflation environment and forecast increases in the interest rate environment, changes which will need the proper assessment. In terms of globalization, revolution, technology, and the pace of information flow, we are seeing very high volatility in the markets, which also has its own implications.
And before I conclude, I cannot help it but mention environmental and social aspects. These topics are important to me on a personal level as a citizen, and on a professional level as a supervisor, and I have devoted a lot of attention to it since I took the position. The functioning of the banking-economic system is very important to the social fabric of the country. The Banking Supervision Department is working to “strengthen its muscles” concerning such activity. This is partly reflected in its regulation of environmental and climate risk, strengthening the banking system’s activity in the world of ESG, providing weight and significant resources to financial inclusion and financial education, taking a more significant role in the banking corporations’ social responsibility, active work in the areas of diversification, inclusion, and equal opportunities, and more.
The Banking Supervision Department is working to promote responsible banking, and is influencing and encouraging the banks to see themselves as partners in designing the socioeconomic fabric of the country.
It is important to note and to emphasize that profits generated by providing social value have a higher strategic value. This means that businesses should and must take responsibility and have a positive influence on their human and physical environments. This is basically a consideration for the “license to operate”.
The successful realization of these processes should have a positive effect on the quality of life and society in Israel. As part of my job, I will try to make my own modest contribution.
In conclusion, it is important for me to note, and there are apparently very few people in this country who really understand this, the complexity with which the Banking Supervision Department, and the Supervisor at its head, deal with on a routine basis. From the stability of the banking system, to protecting the banking consumer, to aspects of competition and digitization, the range is so large as to be infinite. And every important and material issue can have a tremendous influence on the banking system and its customers—most of Israel’s citizens.
Meir, if I can allow myself to call you by your first name, I wish you health and contentment, and I hope that you will continue your fruitful and welcome work, and that you will grace us with your interesting books for many more years.
Thank you for the honor you have given me in delivering remarks at this important event.