Supervisor of Banks Dr. Hedva Ber said that, “The Banking Supervision Department ascribes tremendous importance to the success of the reform to increase competition, including the step to separate the two credit card companies. As we have stated more than once, we intend to encourage the separated companies so that they can become independent companies with a sustainable business model, the capacity to compete in means of payment and in the credit field, provide value to households and small businesses, and later to enter other financial fields. The directives published today will make it easier for the separated companies, mainly in the field of financing needs and costs, and come further to the leniencies the Banking Supervision Department issued to the companies in terms of capital requirements and the publication of the interchange fee for the coming years in order to create business certainty.”
The main objective of the amendments is to make it significantly easier for the credit card companies to meet current financing needs (liquidity) and to enable them to vary their current sources of financing. The leniencies come in addition to those issued to the companies in the past regarding the capital ratios they must hold compared to the banks (Tier 1 equity ratio of at least 8 percent compared to 9 percent for the banks, and overall capital ratio of at least 11.5 percent compared with 12.5 percent for the banks), and are consisted with the risk-based supervision approach that imposes more lenient requirements on small entities that pose less of a risk to the stability of the financial system.
The main revisions are:
(1) A significant reduction in current liquidity requirements: There will be a change in the arrangement of transferring money between banks and credit card companies in respect of bank cards, which will reduce the financing needs and financing costs of the companies. According to the new arrangement, the banks will finance the liquidity needs in respect of bank card activity. They will be required to transfer the money in respect of bank customers’ payment card activity to the credit card companies at the time the companies are required to transfer that money onward (to the acquirers), and not at the time the banks charge their customers as has been done until now. The arrangement will come into effect on February 1, 2019. This step is expected to reduce the companies’ liquidity needs during the month by a few billion shekels.
(2) Ensuring lines of financing from the banks and their price:
- For the purpose of measurement and capital adequacy, the banks will weight the credit they give the credit card companies in a manner similar to the credit issued to the banks. This provides a response to the concern that the companies will be able to obtain less credit from the banks and that it will be more expensive, due to the increased capital requirement it entails.
- The banks and credit card companies are subject to restrictions on the provision of credit to an individual borrower and to a group of borrowers.
o Concerning bank credit to the credit card companies, the restrictions are revised so that the credit card companies will be able to gradually organize for the changes that are necessary due to their separation from the banks, and will prevent shocks in the short term to the sources of financing and their cost. The credit card companies’ indebtedness to the bank shall be subject to a restriction of 15 percent of the bank’s capital, similar to the restriction that applies to the indebtedness of one bank to another. However, a transition period will be set for implementation of the directive so that the companies will be able to gradually lower their reliance on the parent bank and vary their sources.
o Concerning the credit provided by credit card companies to the banks, credit derived from the activity of bank customers on the bank cards during the month, there will be no restrictions on this credit for a transition period of five years, so that current activity will be able to take place in this field. The issue will be re-examined in the future.
(3) Leniencies to the credit card companies in the liquidity risk management requirements: A more lenient supervisory requirement on liquidity risk management has been set out so that the credit card companies will be required to manage their liquidity risk according to an internal model, but will not be required to meet a supervisory liquidity coverage ratio.
(4) Adjusting the operating agreements between the banks and the credit card companies to the spirit of the law: In order to ascertain that the agreements between the banks and the credit card companies are congruent with the spirit and objectives of the law, new operating agreements between a bank and a credit card company operating its cards (including renewed agreements where material changes have been made) will be brought to the Banking Supervision Department’s attention and may require its approval.
These amendments are part of the measures taken by the Bank of Israel to advance the implementation of the reform. The most recent measure announced by the Banking Supervision Department was the publication of the interchange fee at the end of February 2018, creating certainty in the field for the coming years. Prior to that, more lenient capital requirements were published for the credit card companies, and it was clarified that the companies would be able to obtain a bank license and recruit short-term deposits if they approach the Banking Supervision Department on the matter. The Banking Supervision Department intends to continue examining the issues that arise from the separation of the credit card companies and the creation of a new equilibrium in the market, and to set out solutions in the spirit of the law that will assist the separated credit card companies.