Slightly
more than one year ago, the Minister of Finance and I established a committee
to examine increasing competition in the financial system (the Strum Committee).
It was not a simple task, and it took a long time, mainly due to the complexity
of the financial system, the complexity of the recommendations, and the
technological changes that are sometimes more rapid than the pace at which
policy makers formulate the recommendations. 
There was also a tremendous amount of work required in translating the
recommendations into legislative proposals that would accurately reflect the
committee’s recommendations.

 

I
want to commend all the partners—Strum Committee members, Ministry of Finance
officials, Ministry of Justice officials, representatives of the Anti-Trust
Authority, and representatives of the Bank of Israel—who were successful in
formulating recommendations to benefit consumers while maintaining the
stability of the system.  I think that
changes in financial systems, due to their complexity and their effect on the
entire economy, must be made by agreement based on assessments by professional
entities, and in the end we reached such agreements.

 

The
changes established by the law, primarily the recommendation to separate the
two credit card companies from the large banks, alongside initiatives led by
the Bank of Israel and the Banking Supervision Department—such as establishing
a Central Credit Register, providing an outline for setting up completely new
banks, promoting increased efficiency in the banking system, and advancing
technology and innovation in the banking system—have in recent years created a
banking system that is advanced and more competitive in the retail and small
business sectors. It should also be remembered that a change in the financial
system requires fundamental, long term, and thought-out processes, as well as
some patience—the reform will generate benefits for the public gradually, over
time.

 

In
this regard, it is important that during the transition period, credit card
holders will not be negatively impacted. 
We therefore thought it appropriate that the banks minimize their credit
facilities to customers over four years, and not over two years, since in our
opinion, the credit card companies are not able to absorb within two years a
volume of facilities larger than the total they currently provide, either in
terms of the volume of their source, or in terms of capabilities regarding risk
management.

 

Another
area that occupies a large portion of the committee’s recommendations is the
area of payment systems.  Partly as a
continuation of the committee’s recommendations, the Bank of Israel has
recently been leading significant changes that will increase competition in
this area, including opening the Shva (Automated Banking Services Ltd.)
protocol and setting conditions for access to the payment systems that will
remove impediments and enable the entry of new players to various segments of
the system, and will support the development of innovative and advanced means
of payment.

 

With
regard to the risks inherent in the reform, there are two main risks with which
we will need to deal. The first is that more banks, more small banks, and more
nonbank financial intermediaries, mean a higher risk of collapse of a financial
intermediary. The second is the trend of rapid expansion of credit to
households. Therefore, it is important that increasing competition in the
credit market, which is important on its own, be done carefully, with
attention paid to developing risks and with appropriate supervision of
the new credit providers. The Financial Stability Committee, about which a
legislative memorandum was published about two months ago, and which will
institutionalize the collaboration and coordination between the various
regulators on the financial system, will have an important role in ensuring the
monitoring, early identification, and timely handling of risks to the financial
system. Against the background of the changes expected in the financial
system, there is particular importance to completing the legislation for
setting it up as soon as possible.

 

Another point in the prudential aspect relates
to the supervision of entities issuing bonds and providing credit in
parallel.  Just one year ago, an
amendment to the Banking (Licensing) Law was approved, setting a benchmark of
NIS 2.5 billion, beyond which supervision would remain with the Bank of
Israel.  It is very important to maintain
such a regulatory status, since at such volumes there is increased concern for
the stability of the financial system in the case of a failure among these
companies, and there is therefore room for prudential supervision similar to
that which exists over banking entities.

 

Another complementary and necessary step is
the promotion and improvement of tools to deal with a bank facing difficulties
and a failing bank. This includes deposit insurance. These tools, which have
become very common worldwide, among other things after understanding the
lessons of the financial crisis, will provide a safety net in the case of a
bank encountering difficulties, such that the adverse impact on depositors, the
financial system, and the economy will be moderate.

 

I can assure you that the many steps we are
taking in the area of competition are being taken responsibly, after serious
and professional consideration of the possible costs and benefits deriving from
each step, and this is a critical condition for the success of the steps while
minimizing the risks existing in the process.

 

In conclusion, the steps in the bill will
lead to a material change in the level of competition in the financial system.
It is important now to focus on implementation of the reforms, and to give them
time to have an impact. These are major changes, and we also need to allow the
system to adjust to them and to reach the new equilibrium that will be created
as a result of the changes and reforms.

 

And one final word.  I need not explain to the honorable members
here the responsibility placed upon you to produce a legislative item that in
the end will serve the public in the best possible way.  The Bank of Israel’s professional know-how
was an important component in formulating the Strum Committee’s
recommendations, and I would like to offer you, the members of this committee,
the Bank of Israel’s professional assistance in this important legislative
process as well.​