Supervising and regulating the banking system

The banking system plays a central role in every advanced economy. It is there that the public deposits the bulk of its financial savings, which the banks use to provide credit to firms and households, among other purposes. Most payments are made via current accounts (demand deposits) which are managed through the banks. Foreign currency transactions are also usually executed via the banks.
The vital services that the banking system provides, and the awareness that any failure of this system would seriously impair the functioning of the economy, necessitate the existence of a banking-supervision system. As stated in section 4(7) of the law, one of the bank's tasks is supervising and regulating the banking system"".

The Banking Supervision Department's functions include:

• supervising the stability of banking corporations with a view to protecting depositors' money;  
• ensuring the proper conduct of banking corporations;  
• assuring fair business relations between banks and their customers

The Supervisor of Banks is appointed by the Governor of the Bank of Israel. Two committees operate alongside the Supervisor:   

• The Licensing Committee advises the Governor and the Supervisor on the issuance of licenses for the establishment of banking corporations, the acquisition of a controlling interest in a bank, and the licensing of bank branches. It is also consulted when legal steps are being considered to ensure the stability of a bank where mismanagement has been found. 
• The Advisory Committee on matters related to banking business is consulted by the Supervisor of Banks on the issuance of new banking directives.  

The duties and powers of the Supervisor of Banks are based on several laws:   

• The Banking Ordinance, 1941, a Mandatory ordinance which has been amended and updated over the years;   
• The Banking (Licensing) Law, 5741-1981;   
• The Banking (Service to Customers) Law, 5741-1981;   
• The Checks Without Cover Law, 5741-1981.   

The Banking Supervision Department uses various mechanisms in the performance of its duties:

Licensing procedures, in particular permits from the Governor, are required by a corporation that wishes to be a banking corporation, and by anyone who wishes to acquire 5 percent or more of the shares in a banking corporation. Permits are granted after thorough investigation by the Banking Supervision Department and consultation with the Licensing Committee. The licensing procedures are intended to ensure banks' ability to operate, as well as preventing elements that are unsuitable -- in terms of financial standing and integrity -- from engaging in banking business or from owning or having material influence on a banking corporation.

Setting norms and limitations: Banks' activities are restricted to ensure proper management and risk control. Within this context, the Supervisor of Banks may introduce provisions concerning the composition of a banking corporation's board of directors and its methods of operation, adequate minimum capital requirements commensurate with the extent of the bank's risk assets, limitations on the maximum amount that may be lent to a single borrower and to parties connected with the bank (owners and executives), etc..

Inspection and examination: Each bank's books are examined and its performance analyzed on the basis of the extensive information gathered by the Banking Supervision Department. The purpose of these activities is to assess the bank's strength and business situation, prevent excessive risk-taking, and ensure compliance with the Supervisor's Proper Conduct of Banking Business Regulations. On the basis of its findings, the Banking Supervision Department takes the required steps to correct deficiencies and, in serious cases, imposes sanctions on the offending bank and its executives.

Encouraging market supervision: Monitoring of banks and their activities by customers and markets is an important part of banking supervision. The Bank of Israel acts to reinforce this aspect, mainly by expanding the requirement that banks disclose relevant information about their soundness, their customer-service activities, and their charges. The Supervisor's instructions regarding the format of the financial statements that banks must publish are among the most advanced in the world. They cover all information required to analyze the bank's development, profitability, and risks. The Banking Supervision Department has also extended the banks' obligation to give customers detailed information about the interest rates they charge and pay, the fees they charge for services, and arrangements governing the contractual relationship between them and their customers.

Handling public enquiries: Customers who feel that they have been mistreated by a bank may complain to this unit, which investigates the complaint and advises both the customer and the bank of its findings. If the complaint is found to be justified, the bank is required to rectify the situation.

Research: Research studies are published in the field of banking, most of them in the periodical "Issues in Banking" and in a Discussion Papers Series.  The Banking Supervision Department also publishes an Annual Survey, in which developments in the banking system are described and analyzed.

Information and Reporting - The Banking Supervision Department gathers and analyzes data that the banks regularly submit to the Bank of Israel, for use by the Department's different units in performing their functions.