Fischer: Strong banking system is vital for economic growth

BOI governor expects inflation to return to target range by mid-2008.

stanley fischer 88 224 (photo credit: Ariel Jerozolimski)
stanley fischer 88 224
(photo credit: Ariel Jerozolimski)
Given an expected growth slowdown in the global economy, the local banking system needs to be kept strong to ensure the robustness of the local economy, Bank of Israel Governor Stanley Fischer warned on Tuesday. "In view of expectations of a growth slowdown in the global economy, and especially the US economy, in 2008, Israel's economy needs the banking system to remain strong and robust," Fischer said at the annual conference of the Association of Banks on Tuesday. "A strong and stable banking system, is vital to the robustness of the economy, and we must not weaken it." Defending the banks, after harshly criticizing them at last year's conference, Fischer added that the banks had recently been subjected to a wave of attacks in the name of competition and customers' well-being. "I too have leveled criticism with regard to one aspect and that is bank fees," said Fischer. "Sometimes the banks themselves take steps that seem to invite such attacks, but we must be extremely careful." The attacks, including the extensive legislative activity regarding banking, was likely to deter anyone, including foreign banks, from starting to operate in Israel, Fischer noted. Eitan Raff, director of the Association of Banks and chairman of Bank Leumi had a different view. "Following the Bachar reform, I believe that today the banks represent the most sophisticated, objective and regulated player in the capital market," he told the gathering. Looking ahead to next year, Fischer said that despite the fact that the future of the world economy looked less rosy, the local economy was in a "very good situation." "It appears that the financial crisis in the US and Europe will become more severe. The central banks are searching for the right tools to deal with the problems of liquidity, and as a result of the difficulties in the financial markets the gaps between central banks' interest rates and market rates are widening," said Fischer. "The first signs of the fruits of the central banks' efforts are becoming visible. If this continues, the interest rate gaps will again become more reasonable, but even then the problem of the collapse of the US housing market and its implications for the economy will remain." Similarly, Raff said next year looked less promising from a macroeconomic point of view and from the point of view of the markets. "The local market as a whole will have to cope with conditions that are less good than those in 2007," said Raff. "We all know that there is a strong interdependence between what is happening here and what is happening in world markets." At the same time, Fischer was confident that Israel's banks were barely exposed to the situation that developed from the US subprime mortgage crisis in the international financial markets. "Nevertheless, Israel's interest spreads have widened, and if a serious slowdown in the US occurs, it is bound to affect Israel's economy too," said Fischer. "Therefore it is imperative that the government continue to observe fiscal discipline, that the Bank of Israel continue to maintain price stability and that the banks continue with cautious risk management. If all the above fulfill their functions properly, and if concurrently the business sector continues to display enterprise and to thrive, we will be able to continue to grow at a good pace, even against the background of some economic slowdown in the advanced economies." At present Israel's economy was in a very good situation, Fischer noted with growth this year expected to be 5.4 percent, or even slightly higher. "The Inflation rate is slightly higher than the upper bound of the target range, but it is expected to return to the target by around the middle of next year. The Bank of Israel, for its part, will make every effort to ensure this outcome," he said. Discussing ways of increasing competition in the banking sector, Fischer said the Banking Supervision Department was already taking steps to remove barriers "to increase the chances of an Internet bank operating in Israel, to advance the privatization of the Postal Bank and to regularize its banking activity and to bring about the entry of a foreign bank into the field of retail banking in Israel." All, he said, "without waiving considerations of banking-system stability."