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(photo credit: Ariel Jerozolimski)
Bank of Israel Governor Stanley Fischer on Tuesday urged banks to pass on lowered interest rates and make credit available to the business sector and private customers in an effort to catalyze growth in the economy.
"Recently, the Bank of Israel reduced the interest rate sharply, with the purpose of helping to lower the cost of credit to the business sector and households," Fischer said at the annual conference of the Association of Banks in Tel Aviv.
"In practice, the banks hardly reflected these cuts in the cost of credit they offered. And here again, although in this special period margins are expected to increase, it is important to maintain a sense of proportion. To put it another way, good bankers can make good loans in bad times. If we don't find and preserve the right balance, the economy may pay a high price," he said.
Since the beginning of the global financial crisis in September, the central bank has continually cut interest rates by nearly 2 percentage points, to the current 2.5%. At the end of this month, the central bank is expected to lower the base lending rate by 0.5 percentage points.
Fischer reminded the banks that they have an important role in increasing sources of credit to the business and private sectors to assist the economy's efforts to continue to grow.
"The challenge confronting us at this time is to preserve the relatively good situation in the banking system and to take the steps necessary to enable the economy to emerge from the current period in the best way possible," Fischer said. "This is our main objective, and by 'our' I mean the government, the Bank of Israel, and mainly the Supervision of Banks, but it is surely also an important objective for you, the banks," he said.
Fischer called on the banks to strike the correct balance between their credit policies, which at this time must be cautious, and the need of the economy, particularly the business sector, for finance.
"It is natural that in a time of crisis and uncertainty, such as the present, the banks should exercise special caution in their credit policy," he said. "Moreover, the supervisor of banks [Rony Hizkiyahu] and I encourage the banks to be more careful and not to take unnecessary risks - but this too must be to the right degree."
At the same time, though, Fischer said there was no conflict between the responsibility to support the return of rapid economic growth and the need to support the stability and strength of the financial system, in particular the banking system.
"The financial crisis is still with us, and it is too soon to predict when it will end. We do know, however, that it will end, and the economy will return to growth rates similar to those of the last few years. Hence the importance of not wasting valuable time," he said. "I therefore expect the banks to play their part by finding the correct balance between the need to operate a cautious and prudent policy, essential in itself, and their responsibility as one of the main tollgates along the road towards the economy's medium- and long-term growth. Failure to strike the right balance will cost the economy very dearly."
Also speaking at the conference, Bank Hapoalim chairman Dan Dankner rebuffed recent claims that the banking sector is "squeezing the economy."
"I am confident that Israeli banks have given and will continue to provide credit, each on the basis of its own professional and responsible credit policy. That said, it cannot be expected that the banking system on its own will be able to solve the credit problem, while the nonbanking credit sector is in a serious crisis," Dankner said.
"You can like the banks or not like the banks, but we all need to understand the importance of maintaining the stability and strength of the banking system and the commitment to responsible risk management. In the past, the business sector has benefited from the possibility of getting large amounts of credit from the nonbanking sector, which was an exaggeration. There is no doubt that supervision and control of the nonbanking sector is inferior to that in the banking sector that is evident in the risk management, customer relations and in the handling of customers facing hardships," he said.
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