Introduction
Banking regulation is a broad field that is intended to control one of the most dynamic and important systems of the economyāthe banking system.
The banks in Israel are subject to stringent regulation (Plato-Shinar 2016, pp. 14ā16). The regulator in charge of the banking system is the Supervisor of Banks at the Bank of Israel (Banking ordinance 1941, s. 5), which constitutes the highest monetary authority and the central bank of the State of Israel (Bank of Israel Law, 5770-2000, ss. 4, 5). In some issues, regulatory authority over the banks is conferred upon the Governor of the Bank of Israel.
This chapter examines the activities of the Supervisor of Banks and the Governor of the Bank of Israel in respect of the three functions of regulation: rule making, monitoring, and enforcement (Levi-Faur 2011, pp. 3, 6).
The chapter focuses on the two main objectives of banking regulation: maintaining the stability of the banking system (āprudential regulationā) and consumer protection (which is also referred to as āconduct of business regulationā). While, usually, these two objectives complement each other, in certain situations they might be contradicting. The chapter examines whether these two goals should be divided between two separate regulators, or stay consolidated in the hands of the Supervisor of Banks.
The structure of the chapter is as follows: The next section (section āThe Israeli Banking Systemā) explores the Israeli banking system and its unique characteristics. Section āThe Supervisor of Banks and His Regulatory Objectivesā focuses on the Israeli Supervisor of Banks and examines his two regulatory objectives: maintaining the stability of the system and consumer protection. As mentioned earlier, in certain situations these two objectives may conflict with one another. An example of such a conflict is analyzed in the section āSupervision of Bank Feesā, which demonstrates the approach of the Supervisor of Banks to the conflict in the field of the bank fees. Section āOptional Regulatory Modelsā examines whether another model of banking regulation should be adopted in Israel, under which consumer protection would not be handled by the Supervisor of Banks but by another regulator, thus splitting the two regulatory powers between separate regulators. Finally, section āThe Preferred Model for Israelā concludes, by recommending leaving the two regulatory powers in the hands of the Israeli Supervisor of Banks. However, it also includes a few operational recommendations for strengthening consumer protection.
The Israeli Banking System
The banking system in Israel consists of five major banking groups, in addition to three small banks. Apart from the Israeli banks, four foreign banks operate in Israel, but their activity is extremely limited, both in absolute terms as well as in relation to their total assets (Bank of Israel 2017, p. 38).
The Israeli banks provide a wide range of financial services, including corporate and commercial banking, retail banking, housing loans, and credit card services. In addition, they are active in the capital market and engage in securities trading, both on behalf of customers and for their own portfolios. They also provide pension and investment advice services (Banking (Licensing) Law, 5741-1981, s. 10). The law prohibits the banks from managing provident funds, pension funds, and mutual funds, and from holding companies that engage in such activities (Banking (Licensing) Law, ss. 10, 11; Plato-Shinar 2016, pp. 23ā24). The law also prohibits the banks from engaging in insurance activities, from controlling insurance companies and insurance agencies, and limits holdings in an insurance company which constitutes āa significant financial institutionā (Banking (Licensing) Law, ss. 10, 11, 24(a)). In addition, a law introduced in January 2017 compelled the two largest banks to sell the credit card companies under their control (Law to Enhance Competition and to Reduce Concentration in the Israeli Banking Sector (Legislative Amendments), 5777-2017, s. 1).
The five largest banks are public companies whose shares are traded on the Tel-Aviv Stock Exchange. Two of them have controlling shareholders, while in the largest three no controlling interest exists (Tel-Aviv Stock Exchange 2019).
One of the importantāif not the most importantāevents that brought about a revolutionary change in the ownership structure of the banks in Israel was the 1983 āBank Share Manipulation Affair.ā As a result of this affair, the four major banks were nationalized by the State (Plato-Shinar 2016, pp. 37ā38). A process of privatization started at the 1990s and has been completed only in 2018 (Avisar 2018).
The Israeli banking system is strong and resilient (Bank of Israel 2019a, pp. 1, 2, Tables 2 and 3). Israel successfully survived the 2007ā2009 global financial crisis without significant damage to its economy and financial system. The financial institutionsāincluding the banksādisplayed resilience, maintained their stability, and none of the institutions collapsed (Braude et al. 2011).
One of the characteristics of the Israeli banking system is its high level of concentration (Committee to Enhance Competitiveness 2016, pp. 6ā7, 12ā14). As mentioned above, the Israeli banking system is dominated by five large banking groups, whose assets value amounts to almost 94% of the total assets of the system. Approximately 58% of the assets are held by the two largest groupsāBank Leumi and Bank Hapoalim (Bank of Israel 2016, p. 8). This centralized structure constitutes a duopoly, where a small number of companies control the vast majority of the activities in the sector. An entity that wishes to operate in Israel as a bank must obtain a license from the Bank of Israel. However, for years, not only has the Bank of Israel not attempted to stem the trend of concentration, but it has even encouraged it, believing that concentration and power will contribute to the stability of the banks (The Parliamentary Inquiry Committee on Bank Fees 22; Yosha et al. 2007, p. 171; Heth 1994, p. 21).
Another characteristic of the Israeli banking system is a low level of competition between the banks (Committee to Enhance Competitiveness 2016, pp. 14ā15). The strong market power of the banks, and especially that of the two largest banks, creates entry barriers for new players that wish to enter the system, and switching barriers for customers who wish to move from bank to bank (Plato-Shinar 2016, pp. 45ā48); thus enabling the existing banks to maintain the situation of high concentration and low competitiveness.
In recent years, a few reforms have taken place with the aim of increasing competition among the banks, and between the banks and non-bank financial entities. One example is the establishment of a Credit Data Register in the Bank of Israel, that accumulates credit history of customers (Credit Data Law, 5776-2016, s. 16). Another example is the forced separation between banks and their credit card subsidiaries, in order to increase competition in the field of consumer credit (Banking (Licensing) Law, s. 11B). In addition, new financial entities are now able to receive license and provide financial services, such as Credit and Deposit Unions (Control of Financial Services (Regulated Financial Services) Law, 5766-2016, Ch. C1), P2P Platforms (Control of Financial Services (Regulated Financial Services) Law, 5766-2016, Ch. C3); and more. The contribution of these moves to enhancing competition in respect of banking and financial services remains to be seen in the next upcoming years.
The Supervisor of Banks and His Regulatory Objectives
The regulator in charge of the banking system in Israel is the Supervisor of Banks, who heads the Banking Supervision Department at the Bank of Israel. He is appointed by the Governor of the Bank of Israel (The Banking Ordinance, s. 5). Certain powers in respect of the banking system are conferred on the Governor, such as supervision over bank fees (Banking (Service to Customer) Law, chapter B2).
The regulatory goals of the Banking Supervision Department were not determined by law. The Bank of Israel Law states that one of the objectives of the Bank is āto support the stability and orderly activities of the financial systemā (Bank of Israel Law, s. 3a(3)). But this refers to the Bank of Israel as a whole, and relates to the entire financial sector. Instead, the objectives of the Banking Supervision Department are defined by the Department itself according to its own definition of its role, as is reflected in its annual reports (Ben-Bassat 2007, p. 24; Plato-Shinar and Borenstein-Nativ 2017, p. 505).
The Supervisor of Banks in Israel deals with both fields of banking regulation: maintaining the stability of the banking system (āprudential regulationā) as well as...