Bank of Israel calls for unified financial regulation

Banks, insurance and securities oversight would be consolidated.

bank of israel 248.88 (photo credit: Ariel Jerozolimski)
bank of israel 248.88
(photo credit: Ariel Jerozolimski)
The Bank of Israel on Monday reiterated its call for the establishment of a single regulatory authority for all financial institutions and markets in Israel as a more efficient and effective way to cope with financial crises. "Learning from the global financial crisis, there have been many failures, of which one is in regulation. In drawing conclusions for the future there will not be a best, one-size-fits-all model, rather every country will need to adapt a model to its own characteristics and needs. However we are seeing a trend around the world of a partial or full consolidation of regulatory authorities," said Rony Hizkiyahu, the central bank's Supervisor of Banks at a regulation conference at the Interdisciplinary Center Herzliya. "The separation of regulatory bodies in Israel is problematic, especially in a crisis when you need to act as quickly as possibly and in full cooperation." A single authority would replace the three presently operating regulatory bodies - the Banking Supervision, which operates under the Bank of Israel, and the Capital Markets, Insurance and Savings Supervision and the Israel Securities Authority, which operate under the responsibility of the finance ministry. "We are recommending full consolidation of the three regulatory bodies within the Bank of Israel," said Hizkiyahu. "The ISA and the Capital Markets, Insurance and Savings Supervision being operated under the treasury can not act as independent bodies, at least not from a political point of view." In response to Hizkiyahu's proposal, the Finance Ministry's Supervisor of Capital Markets, Insurance and Savings Yadin Antebi rejected the position that a single regulatory authority could be operated by the central bank without any conflicts of interests arising. "It is very easy to say that the treasury is acting in an environment influenced by political pressures," said Antebi. "For a long time our position on regulation has been to set up a single regulatory body outside the central bank or the treasury which is independent of all conflicts of interests." Antebi added that many countries around the world have taken regulation out of the authority of the central bank or the finance ministry. "There is no country in which regulation is unified as a single body within the central bank," said Prof. Avi Ben-Bassat, economics professor at the Hebrew University. "This is an anachronistic model." In a study on the reform Israel's financial market, Ben-Bassat found that the greater the extent of conflicts among regulators and the greater the intensity of the opposition of interest groups, the lower the probability that a reform would be implemented. "These conflicts, together with the strength of interest groups, have led to repeated attempts to introduce reforms, so that on average it has taken eleven years for a reform to be adopted," said Ben-Bassat. Ben-Bassat added that in the past the bank supervision department hasn't benefited from being located in the central bank in managing financial crises, while there were also potential conflicts between the bank's monetary policy and bank supervision and competition. "Israel is among the world's developed countries," said Ben-Bassat. "Most of them have separated the banks' supervision from the central bank." In addition, Ben-Bassat said that the location of financial supervision within the finance ministry, which is also responsible for the state budget, pension market and labor laws, was creating large conflicts of interests. For example, the ministry must weigh issues such as the stability of pension funds versus labor market policy or the stability of financial institutions versus the price of financing government debt. "The independence of the treasury's capital market division is very limited," said Ben-Bassat, speaking from his own experience as former director general at the Finance Ministry. "A unified authority would allow flexibility in regulation and ease of coordination, provide a comprehensive view of the regulated institution and supervision of similar activities for which equal resources are allocated."