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BANK OF ISRAEL
Office of the Spokesperson and Economic Information
August 4, 2015
Press Release
The Bank of Israel’s reaction to the reforms proposed in the Economic Arrangements
Law
 The Bank of Israel supports the items in the Economic Arrangements Law intended
to increase competition and efficiency in the Israeli economy.
 The Bank of Israel supports measures to increase competition in the credit market,
with proper regulation and supervision of consumer and prudential elements.
 The Bank of Israel warns against the risks inherent in the proposal in the Economic
Arrangements Law to permit entities to issue bonds and provide credit without
having the proper supervision and regulation in place, and is therefore opposed to
it.
 The Bank of Israel supports the establishment of a credit providers database, is
acting to establish it, and is prepared to take on the responsibility for its
establishment and management.
The Bank of Israel welcomes the fact that the Economic Arrangements Law for 2015
and 2016 places an emphasis on measures intended to encourage competition and
efficiency in the economy. The law includes a variety of measures intended to reduce
entry barriers for additional domestic manufacturers and for importers in various
industries, alongside measures to increase efficiency and speed of response by the public
sector to the business sector.
The law includes measures to simplify decision-making processes in planning and
construction and speed up the establishment of infrastructures to support rapid occupancy,
while placing an important emphasis on promoting planning and construction in the Arab
sector. The law also includes important measures that aim to increase competition in the
food industry, including the removal of barriers to the import of food products. The Bank of
Israel welcomes the attention paid to the gradual implementation of processes in agriculture,
while compensating domestic manufacturers that may be negatively impacted from the
structural change. Another important measure is accelerating the planning and development
processes in the area of connecting the natural gas pipeline, which is essential both in order
to reduce the costs of production in Israel and support industry, and in order to support the
development of a more competitive gas market. Setting out the authorities and regulation in
the electricity and energy market is important in order to stabilize the relationships between
the various regulators operating in the industry, and to reduce uncertainty on the part of
customers and manufacturers. The Bank of Israel also welcomes the inclusion of measures
intended to reduce and regulate activity by the private sector and the insurance companies in
the healthcare field. In order for these measures to achieve the desired result, it is important
that they be accompanied by the proper and orderly allocation of resources to the public
healthcare field in order to successfully treat the root cause of the problem of demand flowing
to the private system that is the result of limitations of the public system.
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Regarding the financial sector, the Bank of Israel welcomes increased competition in the
credit market in Israel, but warns against expanding the supply of credit, particularly
consumer credit, without proper supervision over the entities providing that credit.
In order to increase competition in the financial system, the Minister of Finance and the
Governor of the Bank of Israel established a committee to increase competition in common
financial services in Israel, which will be discussing a host of measures to promote
competition in the financial system in general and in the credit market in particular. The
committee includes representatives from the Ministry of Finance, the Ministry of Justice, the
Anti-Trust Authority, the Bank of Israel, and the public. The Bank of Israel also has
representatives on the interministerial team to implement the conclusions of the team to
implement regulation of currency service providers—led by the Legal Counsel to the Ministry
of Finance, Adv. Yoel Baris—in order to promote the establishment of a regulatory system to
supervise nonbank financial entities that, at this time, are not under supervision.
Alongside activity to increase competition, the lessons from the many financial crises that
have occurred in many countries in recent years should not be ignored. They show that the
credit market suffers from a high number of structural failures. As such, competition in and
of itself does not necessarily ensure an improvement in the state of households and small
businesses. In order to ensure that competition in the financial markets does not cause harm
to consumers who will be exposed to unsupervised lenders or to financial crises that have
serious consequences for employment and the standard of living, supervision and regulation
that are consistent with the scope and characteristics of the supervised activity are required.
We are opposed to the proposal in the Economic Arrangements Law to amend Section
21 of the Banking (Licensing) Law that is intended to enable public companies to issue
bonds in order to provide credit.
The proposal in the Economic Arrangements Law to amend Section 21 of the Banking
(Licensing) Law to permit public companies to raise funds by issuing bonds totaling NIS 2.5
billion to the broad public with the possibility of increasing it to NIS 5 billion, in order to
provide credit without any supervision, contains many risks. We are therefore opposed to it.
Changing the law may create risks for consumers, small businesses, and the economy as a
whole. While the issue currently is an offering by one company, a change in the law opens
the door to an unlimited number of companies to take advantage of low interest rates in order
to raise debt and aggressively market credit to households, most of which lack the financial
literacy and the consumer protection that are required in this market. The expansion of such
credit that is not limited in its overall scope, poses macroprudential risks that may be realized
in a case where one of the companies that offered bonds and issued credit defaults. These
risks are derived from the concern over the contagion of other companies and the negative
impact on all financial intermediation and activity in the economy. It should not be forgotten
that the current global financial crisis, which is one of the longest in history, is the result of
aggressive marketing of credit to households, which took place in a low interest rate
environment. Despite the fact that the proposed unsupervised activity is currently small in
scope, it could develop into significant dimensions. By way of illustration, the increase in
sub-prime loans in the US in 2004 was on the order of about 2 percent of GDP per year,
which is equal to an increase in consumer credit in Israel of about NIS 25 billion per year.
Therefore, the Bank of Israel calls to reject this proposed law until the formation of a
supervisory authority that will ensure, proportionately, both the area of consumer
protection that is required in the activity of credit providers, and the area of stability.
Changing the law before establishing a supervisory authority will be seen as an
accomplishment today, but may put the public and the economy at risk within a short
time.
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We support the establishment of a credit providers database, and will work toward its
establishment.
The credit market is characterized by a number of barriers to competition that restrict the
quantity of credit and increase its price. The main barrier facing competitors in the credit
market is information asymmetry vis-à-vis the large banks regarding the borrowers’ ability to
repay. This information asymmetry makes it difficult for credit providers and the small banks
to price in borrower risk, and makes it difficult to compete with the large banks over the price
of credit. The Bank of Israel recognizes the importance of removing this barrier, and is
therefore acting in conjunction with the National Economic Council, the Ministry of
Finance and the Ministry of Justice to establish a database of credit providers, and has
taken on the responsibility for establishing it and managing it. The Bank of Israel
welcomes the initiative to advance the Credit Providers Database Law as soon as
possible.
Due to the complexity of establishing a credit providers database and the time it will take until
it is fully operational, the Supervisor of Banks has acted to require the banks to provide their
customers with a “Banking ID” as of this coming February, which will constitute an important
stage in removing the information barrier, thereby increasing competition among the banks
both in deposits and in the field of credit provision throughout the financial system.
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