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The Bank of Israel’s Banking Supervision Department today published for public comment a draft of a new Proper Conduct of Banking Business Directive titled “Supervisory Framework for Small and New Banks.”

The directive was developed following the recommendations of the interministerial team for promoting competition in the retail banking sector, published in August 2025. The team was cochaired by the Supervisor of Banks and the Director of the Budget Department at the Ministry of Finance. Its objective was to enhance competition in the banking system and remove barriers to entry for new participants, including nonbank financial institutions.

The draft directive aims to tailor regulatory and supervisory requirements to the size and complexity of a banking corporation’s operations, without compromising financial stability and in accordance with its systemic importance. The directive is consistent with the Basel Committee on Banking Supervision’s principle of proportionality.

Bank of Israel Governor Prof. Amir Yaron:

“The Bank of Israel has made promoting competition in the banking system a central strategic goal, with the aim of improving banking services for the public at large. We have been advancing this goal in recent years through a variety of tools available to us as a central bank, and we will continue to do so with full determination. The supervisory framework for small and new banks, along with advancing legislation together with the Ministry of Finance regarding graduated licensing, offers a gradual and proportionate approach that lowers entry barriers to the banking system for innovative and competitive institutions, while safeguarding depositors’ funds and the stability of the financial system as a whole.”

Dani Hahiashvili, Supervisor of Banks:

“Today we are publishing for public comment a new draft directive that introduces adjustments and leniencies to the supervisory requirements applicable to small and new banks. This directive complements the many steps taken in recent years and, together with the legislative initiatives being advanced by the Ministry of Finance in cooperation with us, forms the foundation for the entry of new banks and the strengthening of competition in the financial system. We are working to create a regulatory environment that supports the establishment of new banks, recognizing the significant challenges and resources required to set up a bank and comply with regulatory standards. At the same time, the directive implements the Basel Committee’s proportionality approach in a manner that does not compromise the stability of the banking system.”

Purpose of the Directive

The new directive establishes supervisory tiers based on the size of the banking corporation. For each tier, it defines regulatory requirements that correspond to the bank’s scale and systemic importance. Given the significant challenges and resources involved in establishing a bank and meeting regulatory obligations, the directive also introduces a preparatory phase for newly licensed banks, allowing them to gradually implement the requirements applicable to their supervisory tier.

The adjustments are designed to balance the need to ease the regulatory burden on small and new banks and to allow for gradual implementation, with the need to maintain institutional stability, fairness toward customers, and the provision of proper banking services.

In developing the directive, dozens of existing Proper Conduct of Banking Business Directives were reviewed, and for each, adjustments were considered based on the bank’s size and complexity, the feasibility of gradual implementation, and insights from consultations with the public and relevant stakeholders.

The adjustments provide significant relief for small and new banks, including in the following areas: capital and leverage requirements; liquidity requirements and their calculation; limits on industry and borrower concentration; the size and composition of the board of directors; the ability to consolidate functions within the bank’s organizational structure and outsource certain functions; risk management tools; and the flexibility to adopt business models suited to small and digital banks. These adjustments are designed to maintain financial stability and uphold principles of fair customer service.

In addition to the adjustments included in this directive, legislative amendments are also being advanced to further remove barriers to the entry of small and new banks.

The new directive replaces Proper Conduct of Banking Business Directive No. 480, “Adjustments to the Proper Conduct of Banking Business Directives Applicable to a New Banking Corporation and a Banking Corporation in Formation,” published in March 2020. The new draft expands the scope and content of the adjustments previously made under Directive 480 and will apply to both new and existing banks.

This step adds to a series of measures led by the Bank of Israel in recent years to promote competition and remove entry barriers in the banking system, including: the “One-Click Mobility” system, the implementation and advancement of open banking, support for the establishment of new banks, the creation of the credit data registry, and the publication of comparative information on deposit and loan interest rates through the “Equalizer” website. These initiatives have already facilitated the establishment of two new banks in Israel—after more than 40 years in which no new banking license had been granted.

The entry of new participants into the banking system is both an economic and public interest. The Banking Supervision Department intends to ensure that the business relationships between new licensed banks and existing banking corporations continue to operate smoothly.

 

 

What Are the Supervisory Tiers?

Tier

Asset‑Based Limitation

Transition to the Next Tier

Supervisory Tier 1

The bank’s total assets total up to NIS 15 billion.

When the bank’s total assets reach NIS 15 billion, the Supervisor of Banks may consider granting the bank a transition period to Supervisory Tier 2 for up to two years.

Supervisory Tier 2

The bank’s total assets exceed NIS 15 billion and are less than NIS 50 billion.

When the bank’s total assets reach NIS 50 billion, the Supervisor of Banks may consider granting the bank a transition period to Supervisory Tier 3 for up to two years.

Supervisory Tier 3

The bank’s total assets exceed NIS 50 billion.

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What Are the Preparatory Stages for a New Bank to Receive a License?

Stage

Applies To

Activity Limitations

Time Limitation

Preparatory Stage for Supervisory Tier 1

A corporation that has received a banking license and is expected to enter Supervisory Tier 1.

The bank’s total assets total up to NIS 15 billion, and its total deposits total up to NIS 2 billion.

The stage will last up to three years. The Supervisor of Banks may consider extending the stage for up to an additional two years, provided that total deposits do not exceed NIS 5 billion.

Preparatory Stage for Supervisory Tier 2

A corporation that has received a banking license and is expected to enter Supervisory Tier 2.

The bank’s total assets exceed NIS 15 billion and are less than NIS 50 billion.

The stage will last up to three years. The Supervisor of Banks may consider extending the stage for up to an additional two years.