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(photo credit: Courtesy)
The central bank needs to have a role in supervising the financial system to ensure its stability, Bank of Israel Governor Stanley Fischer said Thursday.
“Following the [financial] crisis, there is an understanding that our focus needs to be on the protection of the financial system as a whole,” he said in Tel Aviv at a conference about bank supervision. “It is an issue we can’t waste time on. A crisis is a terrible thing to waste, and therefore if you don’t use it immediately it becomes a waste.
“As the only body that serves as the lender of last resort, the central bank can intervene in a crisis, and therefore I believe that an independent body chaired by the Bank of Israel could be a good solution for the supervision of the financial system as a whole.
“One of the targets of the new Bank of Israel Law is to secure financial stability. To achieve this goal it is essential that the central bank has supervisory authority over the financial system, or at least it needs to be provided with all the information and data necessary to fulfill this mandate.”
Fischer said the crisis had shown that individual institutions can cause great damage to the financial system. Therefore, he said, supervision should be more comprehensive, and regulation of financial institutions and firms in isolation is not sufficient to safeguard the soundness of the financial system.
“In the United States, consensus is growing for the need to concentrate supervision within the central bank,” Fischer said.
In Israel, supervision of the capital markets, insurance and savings currently is under the auspices of the Finance Ministry.
Fischer praised the country’s banks for succeeding in adopting and implementing the Basel II Capital Accord, which recommends international standards for banking laws and regulations.
“I want to thank the banks for adopting and implementing the Basel II Capital Accord in 2009, as was requested of them, despite the global financial crisis,” he said.
Basel II provides guidelines for determining the minimum capital requirements for banks and tightens the link between credit risk and capital allocation, or capital adequacy. The guidelines have been adopted by 60 countries so far. They provide a system of models for evaluating credit and operational risks run by banks in their loans to retail and corporate customers.
Prior to the adoption of Basel II, Israeli banks had taken risks they did not understand, Supervisor of Banks Rony Hizkiyahu said.
“The question is not why Basel II failed to prevent the financial crisis, but rather how we can be better prepared for the next crisis with the adoption of Basel II,” he said at the conference.