17 January 2000
Foreign Banks’ Activity in Israel



* The improvement in Israel’s macroeconomic conditions and the liberalization process which Israel is undergoing have led to growing interest from foreign banks in the possibility of opening a representative office or a branch in Israel.
* The entry of foreign banks into Israel’s banking system is likely to contribute to greater competition in banking, the import of banking technology, and new management techniques, and to improved access for Israeli residents to the international capital markets.
* International experience has shown that the entry of foreign banks leads to increased efficiency of the banking system.
* There are currently nine representative offices of foreign banks operating in Israel, two branches, and two subsidiaries.

In the last few years foreign banks have shown growing interest in the possibility of opening representative offices or branches in Israel, in the light of improvements in Israel’s macroeconomic situation-lower inflation, budgetary discipline, liberalization and deregulation, and the peace process which reduced the geopolitical risk-all of which played a part in Israel’s improved country-risk rating.

The entry of foreign banks is likely to contribute to Israel’s economy by leading to greater competition in the banking industry, the import of banking technology and new management techniques, and improved access to the international capital market for companies and individuals in Israel.

The Bank of Israel Banking Supervision Department notes that the onset of activity by foreign banks in Israel is likely to result in increased efficiency in the domestic banking system, and the introduction of new financial instruments and better techniques of risk management. The foreign banks are also likely to foster stability in the host country, even in a period of domestic recession, due to the wider spread of their assets, their easier access to the international money markets, and their credit-line facility from the parent bank.

The Banking Supervision Department adds that although initially the activity of foreign banks in Israel, like that in other countries, tends to focus on rendering selective services to large customers, as time elapses their activity is expected to expand into offering services to small companies and households.

Increased competition resulting from the entry of foreign banks may in the future enable the supervisory authorities to consider relaxing the limitations relating to the fields of activity in which banks may engage in Israel, and easing the restrictions on possible mergers between them. Activity in Israel by a foreign bank can take place in three ways: via a representative office, a branch, or a subsidiary company.

A representative office may only engage in providing information and referring customers to the foreign bank. No permit is required to set up a representative office, but if it intends to use the word “bank" or a derivative of it in the name of the office it must obtain the consent of the Governor of the Bank of Israel. There are currently nine representative offices operating in Israel having received such consent from the Governor. In the years from 1994 to 1997 an average of only one new representative office opened per year; in 1998 three new offices opened and in 1999, four; and in 2000, only one.

A branch-the Bank of Israel permits large banks with high international ratings to open branches in Israel. There are currently two branches of foreign banks operating here: one (formerly a branch of ANZ) is a branch of Standard Chartered Bank, and the other a branch of Citibank N.A. A permit has recently been granted to HSBC Bank plc to open a branch in Israel.

In general, branches of foreign banks initially engage in providing services to large customers and in other wholesale banking services, and eventually expand into the retail banking field. In Israel, the branch of Standard Chartered Bank provided all banking services from the outset, and the branch of Citibank has announced its intention of extending its services to households in the near future.

A subsidiary-banking activities can be performed in Israel by a foreign bank through a subsidiary either by establishing a new bank in Israel, or by acquiring control of a domestic bank. The policy towards establishing a bank in Israel does not distinguish between holders of controlling interests who are nonresidents, including a foreign bank, and Israeli residents.

There are two foreign-owned banks currently operating in Israel: one is Bank Polska Kasa Opieki Tel-Aviv (Bank Pekao) Ltd., owned by the Italian bank UniCredito Italiano, and Investec Clali Bank Ltd, controlled by the South African Investec Bank.

International experience has shown that from the banking supervision perspective, in considering the two entities, i.e., a branch or a subsidiary company, there is no clear preference for one over the other, particularly in the case of large international banks or banks from countries where there is proper banking supervision on a comprehensive consolidated basis.

A more detailed discussion of this topic is available on the Bank of Israel’s website.