This event marks the publication of Meir Heth’s book, which provides a broad view of the trends and turmoil that have characterized the banking system for almost the last 50 years. His viewpoint is particularly interesting in view of the variety of positions he has held over the years: researcher in the Research Department of the Bank of Israel, the Supervisor of Banks, the chairman of one of the large banks and a professor in academia who is studying the system. One may assess that the processes and trends that the banking system will experience in coming years will be no less interesting and challenging. I will be relating to some of them.
I will present the position of the Bank of Israel with regard to the reforms that in our opinion should be promoted in order to increase competition in the credit market and in the financial system and also those which in the name of “competition” are liable to adversely impact consumers and the public in general.
Before we begin discussing the reforms, it is important to start with an examination of the data and the facts and only on that basis to define the problems and the ways to solve them. What are the trends in the various credit aggregates over time? How does the Israeli system compare to those in other countries? And so on. I will say already at this point and will soon expand on this point—the credit market has changed dramatically in recent years and the proposed reforms should be based on current trends and not on the approaches of the past.
Using the data, we will try to get a full picture of competition, which has served as the basis for the Bank of Israel’s position on this issue. I will say already at this point, and I will illustrate later on, that the Bank of Israel is promoting competition in the financial system and its actions in recent years have proven that.
I will also briefly touch on the public interest in maintaining the stability of the banking system, which is often taken for granted. The volatility that affected the global banking system, primarily in Europe, during the last two weeks, provide a reminder of the importance of maintaining the stability of the financial system.
As of now, more than half of the business credit in Israel is provided from outside of the banking system, and this of course has major implications for the level of competition in this sector. From the point of view of business customers, and primarily large ones, there is an alternative to the banking system. Of course, the development of the nonbank credit market also has implications for stability. I would mention that the corporate bond market, which was less supervised than the bank credit market, was the only market in Israel that was significantly affected by the global crisis.
The development of the consumer credit market and the reforms carried out to reduce concentration have also affected banks’ credit activity. The freed-up sources of capital were increasingly channeled to consumer credit, both housing and non-housing, which was provided for the most part by the banks and has been characterized by a high rate of growth in recent years. The growth in consumer credit and the fact that it was divided among all of the banks is evidence of the increasing competition between the banks in this market. As is known, the mortgage market is a particularly competitive market and the growth in the volume of mortgages began a number of years before the growth in consumer credit. It is possible, therefore, that we are in midst of a process of increasing competition in the consumer credit market. Who hasn’t recently received a text message or email with an offer of credit? Within a few years, we have arrived at a situation in which the quantity of consumer credit is equal to almost half of the quantity of housing credit and therefore we are starting to see an increase in the level of competition in the non-housing consumer credit market as well, against the background of steps taken by the Bank of Israel in recent years, even prior to the planned reforms in this sector.
In view of the rapid growth in consumer credit (which is intended for current consumption, such as non-housing credit, student loans, and the like) in recent years, it is worthwhile to examine these developments relative to other countries. As a result of the rapid expansion in recent years, we have arrived at a situation in which the ratio of consumer credit to GDP in Israel is relatively high—similar to its level in the US and higher than in countries such as the UK, France, the Netherlands and Sweden.
One of the sectors generally considered problematic, from the viewpoint of both prices and access to sources of financing, is the small business sector. This problem is not unique to Israel and the volume of credit to the small business sector in Israel is not low relative to other countries. The government is working to help small businesses through loan funds and it must do more in that area. The interest rate spreads are relatively high in this sector. It is reasonable to assume that part of the difference is the result of high operating costs (such as underwriting costs) of credit to small businesses relative to other sectors. In any case, there is undoubtedly a need to increase competition and access to credit and to reduce the prices in the small business sector. I expect that the transition to digital services will also lead to reduced prices in this sector.
The interest rates on credit cards in Israel are relatively low in comparison to other countries and the interest rates on overdrafts and revolving credit in Israel are similar to those in other countries. (It should be noted that a report ordered by the Ministry of Finance from the McKinsey company shows that the prices of credit in Israel and the level of fees are lower than in the countries chosen as reference in that report.)
Prices are also ultimately reflected in the banks’ return on assets, which is not out of line relative to the average in other countries. This situation is influenced by the fact that the banking system in Israel is characterized by a low level of efficiency relative to the global average, which apparently affects profitability; yet at the same time, the system in Israel is characterized by a lower level of risk than banking systems in other countries. In some countries, the profitability of the banking system has been very adversely affected by the realization of risks that were the result of imprudent conduct.
Cautious conduct and close supervision of the banking system in Israel are also reflected in the fact that Israel did not have to rescue a single bank from failure during the global financial crisis. Such rescues in other countries were costly to their taxpayers. The fact that in Israel we did not have to rescue any of the banks contributed to Israel’s rapid exit from the global crisis with minimal effect on growth, employment and standard of living. The experience of other advanced economies illustrates the damage that we avoided thanks to the maintenance of stability in our banking system and also the extent of damage that may occur if as policy makers we will not do so in the future.
Even though we in Israel did not experience the global financial crisis in the banking system, we have learned from the experience of other countries and we have aligned ourselves with global regulation. In recent years, the Banking Supervision Department at the Bank of Israel has taken numerous measures in order to strengthen the stability of the system. For example, in accordance with international standards, the capital requirements of the banks have been raised markedly, more stringent liquidity requirements have been introduced, etc. These measures, together with additional regulation that is meant to improve the management of risk in the banks and along with regulatory measures to reduce concentration in the banking system, have helped achieve a stable banking system that can deal with future crises. This is not something to be taken for granted, especially now.
What can be learned from what I have so far presented with respect to competition in the financial system?
· There is no doubt that the credit market for large businesses is characterized by a high level of competition.
· The mortgage market is also characterized by a high level of competition, as well as wise consumption by the customers themselves who compare the options available before signing, and this is reflected in the level of prices. It is important to remember that there is a high level of competition in mortgages even under the current structure of the banking system!
· The segments in which there is room to continue to increase competition, as pointed out in past Bank of Israel reports and by the committee that was headed by the former Supervisor of Banks, are the small business sector and the household sector (aside from housing credit).