The nonbanking sector still faces great challenges that threaten businesses, Supervisor of Banks Rony Hizkiyahu said Sunday.
"In the nonbanking sector there was no appropriate pricing for the risks taken," he said at the Globes Business Conference in Tel Aviv. "Risk pricing must be based on risk analysis that takes into account the implications for credit risk of possible changes in the business environment. Special attention must be paid to creating mechanisms to ensure a balance between the responsibility to manage the public's assets, on the one hand, and losses incurred in cases of mismanagement, on the other."
For the nonbanking credit market to function properly in a crisis, risk management must be strengthened, with stricter regulation and supervision, Hizkiyahu said.
"Credit decisions in both the banking system and the nonbanking system must be based on an analysis of risks and an understanding of the environment in which the activity takes place," he said. "At the outbreak of the crisis... the capital market was flooded with many active participants, a wide range of issuers and a dramatic increase in the amount of credit extended to the business sector, unaccompanied by appropriate means of control."
Hizkiyahu said a lack of strict regulation and supervision of the nonbanking sector had led to capital-market failures because of two main problems: the underpricing of nonbanking credit risks and structural problems resulting from the rapid transfer of the public's assets to the nonbanking system without instituting appropriate regulation.
"In the latest economic crisis, the economy experienced a sharp decline in the availability of nonbanking credit, in contrast to the trend in the last few years when most of the credit requirements of the business sector was provided from outside the banking system," he said. "In this period, infrastructures for proper debt arrangements in the economy were conspicuous by their absence, leading to increased volatility in the markets, which in turn reflected investors' uncertainty."
Also speaking at the conference, Bank Leumi CEO Galia Maor said the most important consideration for the next couple of years was risk management.
"The global crisis has made it clear than ever the importance of effective risk management in financial markets," she said. "There is no limit to sound risk management that must include measures for the short and the long term."
Maor criticized recent attempts to weaken the banks, especially large ones.
"Weakening the banks, which have emerged as a stabilizing factor, is poised to threaten the stability of the financial system in the future and to have an adverse effect on the Israeli economy," she said. "The economy needs big banking institutions capable of providing for its development needs, and therefore I believe that the attempts to weaken the big banks in Israel are misplaced."
Maor said lessons learned from the global crisis needed to be implemented gradually and adapted to the needs of the local economy, "rather than hastily taking prescriptions from elsewhere in the world for diseases we don't have."
"The risk level in the global markets has come down compared with the beginning of the year," she said. "But global financial markets have not yet stabilized, and we are certainly not back to Finance Ministry director-general Haim Shani said uncertainty over developments in global markets was overshadowing expectations of a full recovery.
"There is still very high uncertainty about how the global economy will look like in 2010," he said. "Here in Israel we at least managed to secure a firm fiscal policy and pass a two-year budget to work with. Therefore, I prefer to look beyond 2010 and talk about a longer range."
Shani attributed Israel's relatively low GDP per capita level compared with other countries to low participation of large segments of the population, including the haredi and Arab communities, and high bureaucracy.
"We have enjoyed many achievements in the technology sector," he said. "The question now is how we can promise the growth levels we have seen in recent years that were driven by the miracle of the Israeli hi-tech sector."
"At the Finance Ministry we are currently looking into ways for this growth to continue, whether through promotion of the clean-tech or biotech sectors, or incentives such as tax benefits," he added. "A delegation from the US Treasury will be visiting us [on Tuesday] to find better ways of cooperation."
Shani broached the possibility of turning Israel into an international financial center.
"I don't know if Tel Aviv can become a global financial center like New York or London, but if we can manage to bring over 500 to 1,000 Jews with experience in portfolio management to Israel, that will give a significant push," he said. "There would be people here who understand how to manage money in the big world, which in turn would have ramifications in Beit Shemesh, Nazareth and Ashkelon. There could be support centers for the activity set up in Tel Aviv."