28.12.2010
 
Address by the Supervisor of Banks, Rony Hizkiyahu, at a press conference held on his leaving office
 
The Supervisor of Banks, Mr Rony Hizkiyahu, held a press conference today on the occasion of his leaving office. In the course of his address, he reviewed the main actions taken by the Bank Supervision Department during his four years in office in light of the targets he had set on becoming Supervisor, and described the situation in the banking system at the end of 2010 and the challenges it faces in the future.
The Supervisor said that when he took office in 2007, he faced four main goals, two of which were long-term––maintaining the stability and strength of the banking system, and preserving banks’ proper relations with their customers, while encouraging competition in banking services. In addition to these were two shorter-term aims, that constituted specific projects: adoption of the Basel 2 framework in Israel, and restructuring the Bank Supervision Department to function within the new framework.
With regard to the implementation of the international standards as set out in the Basel 2 framework, the Supervisor said that this was done out of awareness that it would help advance the banking system and would strengthen confidence in it in Israel and abroad. The decision was taken to implement the standard approach of the first pillar, as this would enable attention to be focused on promoting corporate governance and upgrading risk management in banks as part of the work on the second pillar of Basel 2 and regular supervisory activity. Together with the preparation for the implementation of Basel 2, the Supervision Department also encouraged banks to increase their capital adequacy ratio to at least 12 percent in order to make them more robust. This, together with the adoption of Basel 2, increased the degree of the banking system’s preparedness for a rainy day
Next, steps were taken to improve the quality of capital, and the banks were required to meet a minimum core capital ratio of 7.5 percent by the end of this year. This requirement is in line with the direction chosen by the Basel Committee in the principles set out following the financial crisis, known as Basel 3. These principles will be put into effect gradually in the next few years.
With regard to bank-customer relations, a far-reaching reform concerning bank fees to households was implemented, which increased the transparency and uniformity of fees, and thus boosted competition in this area. The Bank Supervision Department also dealt with customers who suffered as a result of the collapse of the Heftsiba construction company. As part of the lessons learned from this event, a directive was formulated requiring payments in closed projects to be made via vouchers in order to reduce failures in this area. The importance attributed to dealing with consumer affairs and public enquiries was also expressed by the enlargement of the unit that handled those matters into a division in the Department, headed by a Deputy Supervisor of Banks.
These actions were taken while dealing with the implications of the financial crisis, which was a watershed event in banking. The Bank of Israel and the Bank Supervision Department rapidly drew conclusions even in the course of the crisis, introducing many steps such as increasing transparency regarding banks’ exposure to foreign financial institutions, their expansion abroad and stopping that when necessary, and their exposure to borrowers whose situation was significantly affected by the crisis. These and other measures helped to boost the public’s confidence in the banking system, and drew attention in particular to the fact that the Bank Supervision had not only the ability to act, but also the will to do so, and even to take exceptional actions when necessary.
At the same time, the Bank Supervision Department was reorganized to reflect the targets it faced, the management of the Department was restructured and reinforced. This was achieved by promoting professional and qualified staff, and by integrating veteran and young staff members. Advanced work methods were instituted, in line with those generally employed by the leading regulatory authorities around the world, and a cooperative, professional and good atmosphere was created. The Supervisor emphasized that Israel's bank supervision was highly regarded both in Israel and abroad.
In reviewing the results of the banking system over time, the Supervisor stressed that it was a highly concentrated, stable system, subject to tight supervision. Speaking of indices of the quality of credit, he stated that the amount of problem debt, that had been declining prior to the crisis and that increased during the crisis, was again showing a downward trend, and this matter has to be watched closely.
The Supervisor said that bank supervision and the banking system are facing many challenges. The tightening of regulation has implications for banks’ costs and their ability to expand their activities and increase their income, and requires the allocation of significant management resources. From the risks aspect, there was a strong need to be prepared to deal with international risk that exists in the context of bank’s activities in their overseas offices, activity in their nostro accounts, and the credit portfolio related to exporters and other borrowers exposed to the global economic and financial situation. Domestic activity also entails risks, arising particularly from the increase in credit in the housing and real estate industry. In light of the trends in the real estate market, the Supervisor emphasized the importance of a close scrutiny of the standards for underwriting building projects that will be completed in a few years, when the levels of demand and prices are likely to be lower. The balance between risk management and creation of a return can by struck only via proper corporate governance.
The outgoing Supervisor of Banks wished the incoming Supervisor, David Zaken every success, and stated that the fact that he was appointed from within the Bank is further proof of the strength and professionalism of the Bank Supervision Department. The new Supervisor was actively involved in all measures taken by the Department in the last four years, and he was sure that Zaken would take the reins immediately and successfully.
In conclusion, the Supervisor thanked the Governor of the Bank of Israel, Professor Stanley Fischer, for all his support and backing in the course of the last four years, and also thanked the Bank’s management and staff.