23 December, 1997

The bank of Israel announces the implementation of relaxation of foreign-exchange control and the deregulation of the banking system

The Bank of Israel stated that all the new regulations and relaxation of control will go into effect on 1st January, 1998.

Relaxation of foreign-currency regulations

  • Israeli residents with local currencies are permitted to purchase foreign currency in order to deposit it in foreign-currency accounts in banks in Israel.
  • The restrictions on implementing local-/foreign-currency derivatives transactions by Israeli residents have been removed.
  • Israeli residents are permitted to transfer foreign currency from one foreign-currency account to another.
  • The restrictions on foreign securities investments by Israeli companies have been removed.
  • All the restrictions on investment in foreign securities by mutual (trust) funds have been abolished.

Deregulation of the banking system: changes in the reserve requirements

  • The restriction on the amount of surplus assets or liabilities in foreign currency that a bank may hold (Section 18a of the Reserve Requirements) has been canceled.
  • The reserve requirement on residents' foreign-currency deposits has been converted from foreign to local currency.
  • The 3 percent reserve requirement on restitution deposits in foreign currency for a period of more than one year has been abolished.

The Bank of Israel today announced the implementation of a series of measures intended to relax foreign-currency control and changes in the reserve requirements, constituting the continuation of the process of foreign-currency liberalization and the deregulation of the banking system. These measures are the first of several announced by the Minister of Finance and the Governor of the Bank of Israel in August this year. The remaining measures will be implemented once the necessary preparations have been made by the Bank of Israel and the relevant government bodies.

The Bank of Israel pointed out that the object of the measures, whose implementation was announced today, is to make it easier for banks and the general public to manage their portfolios of assets and liabilities, affording them greater flexibility in managing the risks arising from exchange-rate changes. These measures will also help to improve efficiency, reduce costs, and simplify the system of payments. It was also noted that these steps will increase Israel's international financial exposure, serving to make its financial and money markets more efficient and competitive.

Relaxation of foreign-currency regulations

  • Israeli residents, particularly individuals and the business sector, will be permitted to use local currency to buy foreign currency without any restriction, in order to deposit it in foreign-currency deposits in banks in Israel.

The Foreign Exchange Control Department has announced that foreign currency deposited by provident funds in these foreign-currency deposits will be included in the ceiling of their investment in foreign-currency financial assets-currently 5 percent of the value of their revaluated assets. Concurrently, residents of Israel will be permitted to transfer foreign currency from one foreign-currency deposit in Israel to another, without restriction and without having to convert it into local currency. To date, Israeli residents have been permitted to place in a foreign-currency deposit only foreign currency that came from abroad or was received as a foreign-currency loan from a bank in Israel or abroad.

The Bank of Israel noted that these measures will enable individuals and the business sector to manage their portfolios of assets and liabilities more efficiently, giving them free choice as regards to the kind of indexation, while also reducing costs and simplifying payment procedures in Israel and those between Israel and abroad.

  • All the restrictions on residents regarding local-/foreign-currency derivatives transactions have been removed. This will enable exporters, importers, individuals, and financial institutions to reduce the risks arising from exchange-rate changes. The Bank of Israel also pointed out that the abolition of the restrictions on local-/foreign-currency derivatives transactions will help to develop and extend derivative instruments.

To date, residents of Israel have been allowed to purchase foreign currency in advance in order to execute transactions or undertake derivatives, with certain restrictions regarding the nature and term of the transaction and the use of the currency bought.

  • The ceiling on investments by Israeli firms in foreign securities has been abolished. To date, Israeli companies have been permitted to hold foreign securities of up to 15 percent of a company's sales turnover or 25 percent of its equity, whichever is higher. The restriction on bank deposits abroad, however, remains in force except for exporters, who may hold up to 10 percent of the export proceeds received in the preceding year in a bank abroad. This constitutes another stage in the process of exposing the economy to financial competition with the rest of the world, serving to improve the ability of Israeli companies to manage their financial portfolios by giving them complete freedom regarding any kind of chosen security, indexation and market place.
  • The restrictions on investment in foreign securities by mutual funds have been abolished. Till now, a mutual fund was permitted to hold foreign securities and options of up to 50 percent of its revaluated assets. This step increases fund managers' freedom of choice, enabling them to manage their assets more efficiently in making decisions about yield, risk, and liquidity.

Changes in the reserve requirements

  • The restriction on banks' foreign-currency exposure (Section 18a of the Reserve Requirements) is annulled. This will enable banks to manage their foreign-currency assets and liabilities more efficiently, on the basis of their own economic considerations and without restrictions (except for those imposed by the Supervisor of Banks in order to maintain stability). The abolition of this restriction will enable bank customers-individuals and firms-to manage their deposits and bank credit more efficiently, giving them the freedom to choose between different kinds of indexation. To date, a bank has been permitted to deviate from the foreign-currency requirement regarding assets and liabilities only in accordance with the extent of its equity.
  • The foreign-currency reserve requirement against foreign-currency deposits of Israeli residents may henceforth be held in unindexed local currency in the Bank of Israel, as is the case with the reserve requirement against deposits of the public in indexed and unindexed local currency.

The reserve requirement against foreign-currency deposits of nonresidents will remain in foreign currency. This will serve to expand the basis for the implementation of monetary policy and simplify the system. The Bank of Israel emphasizes that this change in the reserve requirements constitutes another step in the process of unifying reserve rates for different kinds of deposits in banks by terms to redemption, bringing them down to a rational level.

  • The 3 percent reserve requirement on long-term restitution deposits (for over one year) has been abolished, bringing it into line with the rate on other long-term local- and foreign-currency deposits.

The Bank of Israel noted that this was done in the framework of the unification of reserve requirements by term rather than category of deposit or depositor. It will also enable banks to increase the interest paid on residents' long-term restitution deposits. A few months ago the regulations were changed so that recipients of restitutions were permitted to keep them in banks abroad, if they so desired. This new change in the reserve requirements will enable banks in Israel to compete with banks abroad for these deposits.