The Bank of Israel’s reaction to the reforms proposed in the Economic Arrangements Law

• ​The Bank of Israel supports the items in the Economic Arrangements Law intended to increase competition and efficiency in the Israeli economy.

• The Bank of Israel supports measures to increase competition in the credit market, with proper regulation and supervision of consumer and prudential elements.

• The Bank of Israel warns against the risks inherent in the proposal in the Economic Arrangements Law to permit entities to issue bonds and provide credit without having the proper supervision and regulation in place, and is therefore opposed to it.

• The Bank of Israel supports the establishment of a credit providers database, is acting to establish it, and is prepared to take on the responsibility for its establishment and management.

 

The Bank of Israel welcomes the fact that the Economic Arrangements Law for 2015 and 2016 places an emphasis on measures intended to encourage competition and efficiency in the economy.  The law includes a variety of measures intended to reduce entry barriers for additional domestic manufacturers and for importers in various industries, alongside measures to increase efficiency and speed of response by the public sector to the business sector.

 

The law includes measures to simplify decision-making processes in planning and construction and speed up the establishment of infrastructures to support rapid occupancy, while placing an important emphasis on promoting planning and construction in the Arab sector.  The law also includes important measures that aim to increase competition in the food industry, including the removal of barriers to the import of food products.  The Bank of Israel welcomes the attention paid to the gradual implementation of processes in agriculture, while compensating domestic manufacturers that may be negatively impacted from the structural change.  Another important measure is accelerating the planning and development processes in the area of connecting the natural gas pipeline, which is essential both in order to reduce the costs of production in Israel and support industry, and in order to support the development of a more competitive gas market.  Setting out the authorities and regulation in the electricity and energy market is important in order to stabilize the relationships between the various regulators operating in the industry, and to reduce uncertainty on the part of customers and manufacturers.  The Bank of Israel also welcomes the inclusion of measures intended to reduce and regulate activity by the private sector and the insurance companies in the healthcare field.  In order for these measures to achieve the desired result, it is important that they be accompanied by the proper and orderly allocation of resources to the public healthcare field in order to successfully treat the root cause of the problem of demand flowing to the private system that is the result of limitations of the public system.

 

Regarding the financial sector, the Bank of Israel welcomes increased competition in the credit market in Israel, but warns against expanding the supply of credit, particularly consumer credit, without proper supervision over the entities providing that credit.

 

In order to increase competition in the financial system, the Minister of Finance and the Governor of the Bank of Israel established a committee to increase competition in common financial services in Israel, which will be discussing a host of measures to promote competition in the financial system in general and in the credit market in particular.  The committee includes representatives from the Ministry of Finance, the Ministry of Justice, the Anti-Trust Authority, the Bank of Israel, and the public.  The Bank of Israel also has representatives on the interministerial team to implement the conclusions of the team to implement regulation of currency service providers—led by the Legal Counsel to the Ministry of Finance, Adv. Yoel Baris—in order to promote the establishment of a regulatory system to supervise nonbank financial entities that, at this time, are not under supervision.

 

Alongside activity to increase competition, the lessons from the many financial crises that have occurred in many countries in recent years should not be ignored. They show that the credit market suffers from a high number of structural failures.  As such, competition in and of itself does not necessarily ensure an improvement in the state of households and small businesses.  In order to ensure that competition in the financial markets does not cause harm to consumers who will be exposed to unsupervised lenders or to financial crises that have serious consequences for employment and the standard of living, supervision and regulation that are consistent with the scope and characteristics of the supervised activity are required.

 

We are opposed to the proposal in the Economic Arrangements Law to amend Section 21 of the Banking (Licensing) Law that is intended to enable public companies to issue bonds in order to provide credit.

 

The proposal in the Economic Arrangements Law to amend Section 21 of the Banking (Licensing) Law to permit public companies to raise funds by issuing bonds totaling NIS 2.5 billion to the broad public with the possibility of increasing it to NIS 5 billion, in order to provide credit without any supervision, contains many risks.  We are therefore opposed to it.

 

Changing the law may create risks for consumers, small businesses, and the economy as a whole.  While the issue currently is an offering by one company, a change in the law opens the door to an unlimited number of companies to take advantage of low interest rates in order to raise debt and aggressively market credit to households, most of which lack the financial literacy and the consumer protection that are required in this market.  The expansion of such credit that is not limited in its overall scope, poses macroprudential risks that may be realized in a case where one of the companies that offered bonds and issued credit defaults.  These risks are derived from the concern over the contagion of other companies and the negative impact on all financial intermediation and activity in the economy.  It should not be forgotten that the current global financial crisis, which is one of the longest in history, is the result of aggressive marketing of credit to households, which took place in a low interest rate environment.  Despite the fact that the proposed unsupervised activity is currently small in scope, it could develop into significant dimensions.  By way of illustration, the increase in sub-prime loans in the US in 2004 was on the order of about 2 percent of  GDP per year, which is equal to an increase in consumer credit in Israel of about NIS 25 billion per year.  Therefore, the Bank of Israel calls to reject this proposed law until the formation of a supervisory authority that will ensure, proportionately, both the area of consumer protection that is required in the activity of credit providers, and the area of stability.

Changing the law before establishing a supervisory authority will be seen as an accomplishment today, but may put the public and the economy at risk within a short time.

 

We support the establishment of a credit providers database, and will work toward its establishment.

 

The credit market is characterized by a number of barriers to competition that restrict the quantity of credit and increase its price.  The main barrier facing competitors in the credit market is information asymmetry vis-à-vis the large banks regarding the borrowers’ ability to repay.  This information asymmetry makes it difficult for credit providers and the small banks to price in borrower risk, and makes it difficult to compete with the large banks over the price of credit.  The Bank of Israel recognizes the importance of removing this barrier, and is therefore acting in conjunction with the National Economic Council, the Ministry of Finance and the Ministry of Justice to establish a database of credit providers, and has taken on the responsibility for establishing it and managing it.  The Bank of Israel welcomes the initiative to advance the Credit Providers Database Law as soon as possible.

 

Due to the complexity of establishing a credit providers database and the time it will take until it is fully operational, the Supervisor of Banks has acted to require the banks to provide their customers with a “Banking ID” as of this coming February, which will constitute an important stage in removing the information barrier, thereby increasing competition among the banks both in deposits and in the field of credit provision throughout the financial system.