Concentration and Competition in the Banking System

1. Concentration and Competition in the Banking System Rony Hizkiyahu, Supervisor of Banks Bank of Israel June 26, 2007

2. Competitiveness in the Israeli Banking System The level of competitiveness in the Israeli banking system is lower than the average worldwide level The low level of competitiveness is the result of: • High concentration of the banking system • Absence of any tangible competitive threat

3. 1. Concentration in the Banking System (2) • Data are from reports received by the Supervisor of Banks in the various countries, and are on a consolidated basis. • Israel’s peer group consists of eight countries with similar sized economies and size and concentration of banking system: Belgium, Denmark, Greece, Norway, Portugal, South Africa, Ireland and Finland. • Source: Ruthenberg, Working paper (2006), “Competition in the Banking Industry : Theoretical Aspects and Empirical Evidence from Israel in an International Perspective”

4. 2. The Competitive Threat Major components: • Efficient capital market • Innovative financial instruments • Entry of foreign banks

5. 2. The Competitive Threat (cont.) • Drop in government borrowing • Shifting company activities away from banks • Rise in corporate bond and share issues in Israel and abroad • Bullish capital market due to improvements in economic activity • The banking system - a tightening of regulatory environment

6. Competitiveness and Concentration – Factors behind the changes Bachar Reform (2005) • Gradual sale of banks’ holdings in provident and mutual funds; • Setting limits on market share of those purchasing long-term saving vehicles; • Setting rules on advice and marketing of financial and pension products.

7. Enhancing Competition in the Banking System • Retail sector – impact on prices • Raises efficiency of the system • Reduces system costs • Attracts foreign investors • Increases consumer welfare Implications:

8. Competition Enhancing Measures Short term: Encouraging competitiveness in the retail banking sector • Promoting legislation which empowers the Bank of Israel to regulate banking service fees • Increasing transparency in price disclosure and in other areas of banking services • Mobility - making it easier to move from one bank to another

9. Competition Enhancing Measures (cont.) Medium term: Developing markets and advanced financial instruments • Promoting securitization and prudential regulation • Developing the Repo market • Distributing mutual funds by those who aren’t members of the stock exchange

10. Competition Enhancing Measures (cont.) Medium term: Developing markets and advanced financial instruments • Short-term commercial paper issued by private companies • Nostro investments and market makers by the banks • Money Market Funds

11. Competition Enhancing Measures (cont.) Long term: Optimal structure of the banking system • Optimal number of banks in system (triopoly, duopoly etc.) • Increasing the number of banks in the system • Encouraging small and medium-sized banks (affirmative action, deposit insurance) • Encouraging foreign banks (reducing entry barriers and providing incentives) • Encouraging ‘direct’ or ‘virtual’ banks • Entrance of Postal Bank as a competitor in the banking sector • Credit card companies

12. Further Promotion of Competitiveness The answer to concentration and the problem of competition stems from further development of the nonbanking financial market, while coping with the associated risks.

13. Thank you