The Zaken Committee proposed a series of measures to increase competition in the banking sector Monday, including encouraging the creation of an Internet bank and credit unions.

Israel’s banking system suffers from a high level of concentration that inhibits competitiveness, a low level of profitability by international standards, and a low level of operation efficiency relative to banks in developed countries, the committee concluded in its preliminary report. It said this last point was partially due to high wage costs relative to the banks’ scale of activity.

Bank of Israel Governor Stanley Fischer and Finance Minister Yuval Steinitz established the committee eight months ago, appointing Banks Supervisor David Zaken as chairman.

They tasked it with recommending measures to increase competition in the banking-services market, improve household and small business bargaining power, expand customer options, improve the level of services and reduce its cost.

The report proposed a number of structural measures whose goal is to increase the number of players in the industry, including encouraging the creation of an Internet bank or credit union, which it said would “increase competition in the retail segments of the banking system” in the medium-to-long term.

It said the central bank’s Banking Supervision Department should help entrepreneurs to create such institutions by amending regulations and providing appropriate guidance and direction.

Institutional investors, including insurance companies, pension funds and provident funds, should also be encouraged to enhance competition in certain segments of activity in the banking system, but face barriers that prevent expansion or entry into the retail credit market, the report concluded.

It recommended examining the mechanism for channeling long-term public savings to the provision of credit to households and small businesses.

The report also presented a series of measures that it said would increase competition between existing players, reduce information barriers and enhance transparency and fairness. It proposed creating the option of opening accounts through the Internet, making it easier and simpler to close accounts, and publishing the banks’ actual interest rates for purpose of comparison.

It proposed issuing banking identity cards in a uniform format, which will provide a full and accurate picture of a customer’s assets’ liabilities, yield and bank fees. It said this would increase the customer’s ability to manage their financial affairs wisely, and would make it easier to compare their bank with rivals.

Regulatory intervention was covered in detail in the report, with the team formulating recommendations for the control or cancelation of a number of existing banking fees. These measures will not necessarily lead to increased competition, the report said, but will hopefully eliminate market failures that could occur as a result of the existing structure.

The report devoted an extra chapter to small businesses, in the belief that this sector deserves at least as much attention as households. It found that the volume of credit to this segment is small relative to its contribution to business output, but that bank-financing margins are relatively higher for small businesses.

It proposed a number of measures specifically aimed at small businesses, including reducing bank fees, facilitating the early redemption of business credit, creating a database to analyze their standing, and increasing the scope of reporting on provision of credit to this sector.

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