Israel ’ s Banking System, Annual Survey 2006

1. Israel’s Banking System, Annual Survey 2006 Rony Hizkiyahu, Supervisor of Banks Bank of Israel September 5, 2007

2. Israel’s Banking System, Annual Survey 2006 • The banking system in Israel • Activities of the Banking Supervision Department

3. The banking system in 2006 • Continued improvement in the banking system’s robustness • The challenges facing the banking system • The banking system’s readiness to meet the challenges

4. Improved robustness of the banking system • Increased yields and net profits, mainly due to one-off capital gains • Sharp drop in loan-loss provisions (problem debt is still large) • Slight rise in capital adequacy (but this is still lower than the norm in the advanced economies)

5. Risk-Weighted Capital Ratio of the Banking Major Groups, 1999 to June 2007

6. Challenges facing the banking system • Reduction in traditional banking intermediation • No growth in business credit—funds raised in capital market • Alternatives to deposits for the public outside the banking system • Changes in the composition of income and expenditure • Increased expenditure • The threat of reduced fee income

7. The banking system’s response to the challenges Creating alternative sources of income • Developing innovative financial instruments • Expanding credit-card activity • Increasing income from financial activities • Expanding activities abroad • Entering the business of pension advice Streamlining the banking system • Continuing trend of mergers and privatization of mortgage banks and small banks • Adopting new technologies and shifting to electronic banking

8. Activities of the Banking Supervision Department Objectives of Banking Supervision • Maintaining the stability of the banking system • Implementing Basel II • Boosting competition and efficiency in the banking system • Maintaining fair practice in bank-customer relations

9. The objectives of the Banking Supervision Department Basel II - Aims • Improving the stability and soundness of the banking system • Creating uniformity and credibility and adjusting to the international system • Moving toward risk-focused management • Corporate governance—implications for banks’ management

10. The objectives of the Banking Supervision Department Basel II –Banking Supervision’s plans for implementation • 30 January 2007—Declaration of Israel’s adoption of the Basel II Accord • Setting date set for full implementation—end 2009 • Drawing up joint work schedule with the banks • Follow up and support for the implementation of Basel II in Israel

11. The objectives of the Banking Supervision DepartmentStability of the banking system • Emphasizing management of processes at Board of Directors level • Encouraging the banking system to increase its risk-weighted capital ratio • Directives on managing impaired debts

12. The objectives of the Banking Supervision DepartmentEncouraging competition in the banking system • Concentration in the banking system • Competition in the financial system • The non–bank market • Ways to encourage competition: • Short term – Banking Fees Law, enhancing transparency and facilitating the move from one bank to another • Medium term – developing financial instruments, securitization, and REPOs and direct banks • Long term – foreign banks • The image of the banking system

13. The objectives of the Banking Supervision DepartmentBank-customer relations • Reinforced bank-customer relations • Banking (Service to Customer) Law (Supervision of Fees) • Discovering system flaws • Consumer-oriented directives—credit facilities, mortgages, facilitating the move from bank to bank • Informing the public—transparency, explanation and assistance on consumer matters via the Bank of Israel website

14. Thank you