Download Israel`s Capital Market Reform Bank of Israel and the IMF

Israel’s Capital Market
Reform
Bank of Israel and the IMF
Prof. Dan Galai
Sigma PCM and the Hebrew
University
Feb. 27 2008
What Were the Objectives of the
Reform?
*Lessening the dominance of the
major banks.
*Enhancing competition. •
*Reducing potential conflicts of •
interests
*Reducing operational costs to •
customers.
*Enhancing information flow •
•
Efficiency-What does it mean?
Three meanings of efficiency:
*Allocation (Pareto)
*Information
*Operations

The trade-offs between classes of
“efficiency”
How much Regulation is Optimal?
-Read Stigler’s Organization of Industry
His conclusion: at the end of the day
regulators help the industry rather than
the consumers. (e.g. the case of
restrictions on investments in the QQQ).
-The “shadow price” of regulation.
-Not differentiating between more and less
important issues.
“Hermon” as a Case Study
-The reform’s intention was to enhance
competition.
-The incentives scheme to attract “stars”.
-Competition is on yields; risks are usually
ignored.
-Managers assume more risks to achieve
higher returns and maximize their
incentives!
-How to align risks, returns and incentives?
-Where are the control systems?
On the Education of the Israeli
Investor
The Israeli investor*lacks the proper education
*is emotional about money
*believes in real estate
The Ostrich Effect
Can the Regulator be the Educator?
What should be done?
-Find the right balance between investors
protection and competitiveness in the
financial markets. Avoid “corner solutions”.
-More transparency
-More responsibilities on board of directors
(e.g. the case of “Sharei Ribit”, or,
“regulatory arbitrage”).
-Align the regulators and make regulation
more uniform.