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The Bank of Israel attaches great importance to promoting competition and fairness in the financial system and has, over the years, advanced significant reforms in this area. These reforms are intended, among other things, to strengthen consumers’ position vis-à-vis the banks, increase transparency, facilitate switching between banks, and encourage new entrants into the banking sector—all while continuing to safeguard depositors’ funds and preserve the stability of the banking system.

Following the declaration by the Director General of the Israel Competition Authority designating the five largest banking groups as a concentration group, and the issuance of directives in the area of deposits (the “Directives”), the Bank of Israel’s position is that, under the circumstances, declaring the banks a concentration group is an extreme and disproportionate step. It may deter investors from operating in Israel, while it is not expected to contribute in any meaningful way to improving the welfare of bank customers. This is particularly so given that most of the directives accompanying the declaration have already been implemented in practice by the Banking Supervision Department as part of the structural reforms it has led. For example:

  • The requirement for centralized and comparative publication of common deposit products, including search and comparison mechanisms, is regulated under Proper Conduct of Banking Business Directive No. 447, “Publication of Interest Rates on Deposits and Credit Balances in Accounts,” and is already being implemented in practice.
  • The requirement to present information regarding money market funds is regulated under Proper Conduct of Banking Business Directive No. 447A, “Publication of Centralized Information on Money Market Funds and MAKAM,” and is already being implemented in practice.
  • The ability to open and manage a deposit without a current account, as well as measures to facilitate the transfer of funds between banks, were regulated under Proper Conduct of Banking Business Directive No. 417, “Activity of a Banking Corporation in a Closed System.” Following a public consultation process on the matter, in which the Competition Authority also participated, Section 5B2 of the Banking (Service to the Customer) Law, concerning “Deposit of Funds in a Closed System – Transfer of Deposits,” came into force and requires banks to allow customers to place deposits in a closed system.

Under these circumstances, the declaration and the directives accompanying it remain, to a large extent, merely declaratory in nature. As such, they undermine regulatory certainty in the Israeli economy and may therefore deter investors from operating in Israel, without generating any competitive benefit.

The Bank of Israel believes that the preferred path to enhancing consumer welfare is through the removal of barriers and the strengthening of transparency. Accordingly, over recent years the Bank of Israel has undertaken numerous measures in this regard, some of which are already having a positive impact on the level of competition in the financial system. One notable recent step is the removal of entry barriers for small banks, advanced through the framework for a graduated banking license—an initiative in which the Competition Authority was also a partner.

A departure from this principle, and the use of the declaration tool, should be reserved for particularly exceptional cases in which there is a solid and clear evidentiary basis showing that the benefits of the declaration outweigh its costs, and only after more proportionate alternatives have been examined. Although formal dialogue took place between the Banking Supervision Department and the Competition Authority[1], the Authority did not present a persuasive evidentiary basis showing that the contemplated directives were expected to yield competitive benefits exceeding their costs, nor that the risks and systemic implications had been thoroughly considered. In the absence of such an examination—and particularly where the directives overlap with measures already advanced by the Bank of Israel—it is difficult to justify the use of such an exceptional tool as a declaration of a concentration group.

It should be noted that, in the course of the proceedings conducted by the Director General with the Banking Supervision Department prior to the declaration, the Bank of Israel drew the Director General’s attention to the fact that, with respect to at least some of the directives she sought to impose, the law requires the consent of the Bank of Israel. Such consent was not granted.

The Bank of Israel will continue to act, within the scope of its authority and through professional dialogue with all relevant parties, to promote fair and effective competition, while carefully safeguarding the stability of the banking system, the public’s funds, and public welfare.

 

 

[1] Over the past three years, formal dialogue took place between the Banking Supervision Department and the Competition Authority, including several working meetings, consultation meetings, and extensive correspondence. Throughout this process, the Banking Supervision Department consistently presented a clear, well-founded, and professional position, grounded in its responsibility and mandate to preserve system stability, protect public funds, and advance fairness and competition.