Israel's Banking System - Annual Survey, 2018
Introduction by the Supervisor of Banks
The Annual Survey of Israel's Banking System provides the public with insight into how the Supervision of Banks views the developments in the banking system, its activities and its risks, as well as the Supervision of Banks' policy, its actions to benefit the general public, and supervisory points of emphasis with a forward-looking view.
The Banking System
The banking system has changed dramatically in recent years. It has improved its stability following numerous supervisory requirements, reduced its exposure to large financial risks, and made significant changes in its business-operational model in order to adjust it to "the banking of tomorrow"—which is expected to be more competitive and technology-oriented. Thus, the banks' capital increased by about 50 percent and the capital ratio increased by about 3 percentage points since 2008, in view of the Supervision of Banks' requirements and lessons from the Global Financial Crisis. The banks have applied the lessons from past events—greatly reducing exposure to large borrowers, while increasing the diversification of the banking credit portfolio, and have greatly reduced exposure to nonresidents, where involvement with some of them led to investigations by US law enforcement authorities against some of the banks, and to fines (against Bank Leumi and Mizrahi Bank, and an expected fine against Bank Hapoalim). In view of the incentives provided by the Supervision of Banks, the banks have undergone significant streamlining, which was reflected in a large reduction in staff and in real estate, adjustments of organizational structures, and changes in work processes. Regulatory barriers were removed, and large investments were made, in technological and digital innovation to adapt banking services to the "fourth industrial revolution". These measures were reflected in the banks' financial results and in the confidence of the capital market, as seen in the continuing upward trend of bank share prices beyond the general stock index. In recent years, bank shares have gradually been sold by controlling owners to the general public, and today, the public holds about 83 percent of the banks' shares. As such, the public is benefiting from increased dividends being distributed by the banks, and from higher share value.
In recent years, the financial risks in banking activity declined, led by credit risks and liquidity risks, while operational risks rose in relative terms, led by cyber and technological risks derived from the "technological revolution" that is sweeping all areas of our lives. As an additional tool for estimating banking risks and how they are changing, this year for the first time, the Supervision of Banks carried out a broad survey among the senior officials of all the banks and credit card companies to examine their perception of the main risks. Roughly 80 officials—chairpersons, external directors, CEOs, risk officers, and internal auditors—answered the survey. The survey clearly showed that cyber risk is the risk that most worries the banking system. Ninety percent of officials are concerned about this risk—an extremely high rate compared with all the other risks they noted in the survey (Figure 1.15). This is also currently the most worrisome risk for the Supervision of Banks, and we are working to make sure that this risk is managed adequately. The survey also shows that in order to manage the risk, and in view of the Supervision of Banks' demands, the banks have appointed cyber risk management experts, created programs to deal with cyber incidents, greatly increased the resources invested in information security, and installed monitoring and protection technologies.
Supervision of Banks policy and main activities
The Supervision of Banks is working to achieve a number of goals to benefit the public and the economy. These include protecting depositors' money in the banking system (maintaining the stability of the banks), protecting the banking customer, and promoting competition. Alongside these, the Supervision of Banks has been advancing two secondary goals in recent years—implementing technological innovation, and improving the efficiency of the banking system.
Promoting competition: In the past year, a number of significant projects came to fruition that were promoted by the Bank of Israel and the Ministry of Finance with the aim of enhancing competition in banking services to households and small businesses. (a) Two credit card companies were separated from the largest banks, creating two independent and competitive financial entities. (b) The Credit Data System was established by the Bank of Israel and began functioning, and will increase competition from nonbank entities over the provision of credit to households. In addition to all the banks and credit card companies reporting to the credit data system, 18 nonbank financial entities offering credit to the public have so far joined, and the number continues to increase. (c) The winning bid was chosen in the tender to set up a computer services center, a project that is expected to make things easier for new banks and financial institutions to get started and to support the operations of existing small banks. (d) Ownership of the Shva (Automated Banking Services) company (the economy's main acquirer switch) changed with the entrance of two leading international entities (Visa and Mastercard) as shareholders of the company in place of bank holdings. These entities will be able to contribute from their global experience to advance the payments field in Israel. (e) For the first time in many years, requests to establish a new bank were submitted to the Supervision of Banks, as a result of the Supervision of Banks' removing many barriers (lowering the capital requirements for a new bank, creating regulatory certainty in the process of granting a bank license, and more).
Each of these competition-enhancing projects is large and complex to implement, and together they provide a new infrastructure for enhancing competition in banking and in the payment field as a whole. These projects require broad regulatory preparations—adjusting Proper Conduct of Banking Business directives, revising legislation, coordinating between a number of regulators—alongside large-scale and expensive operational preparations on the part of the banks and financial institutions in the economy.
The results of these measures to increase competition have already begun to take shape, and this process is expected to continue gradually over the coming years. We already see an increase in the availability of credit to households and small businesses via nonbank entities. In recent years, acquirer fees for businesses have declined, mainly for small and medium businesses. Bank and credit card company customers are benefiting from digital-financial innovation—easy-to-use payment applications, applications for performing a wide variety of banking activities remotely (such as managing a securities portfolio), the possibility of opening a bank account online without coming to a branch, and more. This innovation is a direct result of the efforts being made by the banks to compete over customers, and the removal of regulatory barriers. In the framework of competition, there are banks that are promoting remote technological-digital service, while others are actually strengthening their personal service in the branches.
Alongside these changes, additional ones in the structure of the banking-finance market were established this year. Concentration within the banking system continued to decline: The market share of the two large banks shrank to about 55 percent, as the share of the medium-sized banks increased. The number of nonbank entities offering credit to households and small businesses increased, and the credit data system that recently began operating is expected to strengthen these entities. We can expect these trends to continue in the coming years, and for the banking market to continue to change. A change to the Banking (Licensing) Law may be required since, as of now, it limits the operating field permitted for banks in Israel. This would enable the market to continue adapting itself to the changing technological-competitive environment.
Promoting technological innovation: In order to promote the incorporation of innovation in banking, the Supervision of Banks worked to remove regulatory barriers. For this purpose, it removed barriers to the transition to cloud technology, revised supervisory directives so that customers would be able to execute transactions via direct and remote means (by email, facial recognition technology, and more), and encouraged cooperation between the banks and fintech companies which help with incorporating innovation to benefit customers and streamline work processes at the banks. It is necessary to adapt the banks' business models, even while taking certain risks in the field of technology and innovation, in order to offer customers better service that is innovative and adapted to their needs, and in order to ensure the existence of a sustainable banking business model and manage a greater risk—the strategic risk of the banks. One of the indices showing the digital change taking place in the banking system is the percentage of banking transactions that households execute via digital and direct means. Since the Supervision of Banks began collecting this data, transactions executed by direct means have risen from 45 percent of all banking transactions in 2016 to 60 percent in 2018. In parallel, the Supervision of Banks worked to ensure that all digital customer transactions will be cheaper than transactions executed via a teller.
Protecting the banking customer: In order to stimulate the banks to compete over improving the quality of banking service to households, the Supervision of Banks conducted a satisfaction survey among households for the first time this year, and published the results. The Supervision of Banks intends to conduct and publish such a survey annually. The results of the survey indicate a tremendous variance between the banks in terms of customer satisfaction. In general, satisfaction with the small banks and those that specialize in specific population groups (teachers, public employees, and so forth) is higher than it is with the large banks. A large variance was also found in the satisfaction with the banks' various communication channels. Satisfaction with waiting time at the branch and with the call center is low, while satisfaction with the digital channels is very high. As a result of the survey, the Supervision of Banks required all the banks to present plans to strengthen those areas where customer satisfaction was low, and the banks that had to do so, developed significant plans to improve the service.
In parallel, the Supervision of Banks worked during the course of the year to increase enforcement in consumer areas. It conducted examinations in the banks in consumer credit areas, wherein it clarified its requirements concerning fairness in the marketing of credit to households, and published the main points of its findings and requirements to the general public. It also carried out consumer examinations at banks and credit card companies in the areas of consumer credit advertising, sending checks to the customer's home, and ATM service, and imposed financial sanctions on entities that were found to have committed significant violations. The emphasis on consumer enforcement will continue during the coming year as well.
Strengthening risk management and protecting the public's money: Supervision of Banks teams worked this year as well to monitor the developing risks at the level of the system and that of the individual bank, and to require banks to strengthen risk management where necessary. This year, we included a box in this Survey that for the first time explains the methodical risk assessment process carried out by the Supervision of Banks (Box 3.2, "The Supervisory Methodology for Assessing Risks in the Banks"), in order to show the public how the Supervision of Banks conducts the Supervisory Review and Evaluation Process (SREP). In view of the Supervision of Banks' assessments of banks that cyber risk is high and increasing, it worked to strengthen and build the work interfaces with the National Cyber Directorate in order to create a kind of "National Iron Dome" to serve as an additional layer of cyber protection for the banking system. The Supervision of Banks' goal is to ensure that in the event of a large-scale cyber incident in the banking system, the banks and the Supervision of Banks, with the help of the cyber system, will be able to manage it, in a way that will minimize the negative impact on customers, on their confidence in the banking system, and in the stability of the banks, so that the recovery will be rapid.
The Supervision of Banks' main points of emphasis with a forward looking view: The main goals and operations that the Supervision of Banks will deal with in the coming year are to continue promoting measures and projects to increase competition and protection of the banking customer, and in particular to continue checking and guiding groups interested in establishing a new bank; promoting switching from bank to bank online, with the aim of creating a technological and procedural platform that will facilitate customers' mobility between banks; and the Open Banking project, designed to enable customers to easily transfer their financial information, and to thereby receive competing offers from various entities and to benefit from a wide range of innovative financial services (including via fintech companies). The Supervision of Banks will also continue working to promote the payments market in Israel, and to make it more innovative; increase enforcement in consumer areas; and continue to protect weaker populations (the elderly, women who have suffered physical and financial abuse, and more).
On the risk management side, we will continue to act to strengthen technology- and cyber-risk management in the banks and within Supervision of Banks itself, while preparing for a significant incident; to strengthen risk management in the household credit area; and continue ongoing monitoring of additional risks that are developing in banking, while conducting onsite examinations and adjusting regulatory requirements.
Alongside all this, the Supervision of Banks will continue working to increase transparency regarding its activity, toward the Knesset and the general public, including publishing surveys, analyses, and enforcement measures, as part of its response to public expectation of increased transparency on the part of the Supervision of Banks. This expectation was also raised in the report of the parliamentary committee on large borrowers, regarding which the Bank of Israel will publish an in-depth response.