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Israel’s Capital Market Reform Bank of Israel and the IMF

This article discusses the objectives of Israel's capital market reform, including lessening the dominance of major banks, reducing conflicts of interest, and enhancing information flow efficiency. It explores different meanings of efficiency and trade-offs between them, and raises questions about the optimal level of regulation. The case study of the Hermon incentive scheme highlights the challenges of aligning risks, returns, and incentives. The article also addresses the education of Israeli investors and suggests measures for regulators to strike a balance between investor protection and market competitiveness.

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Israel’s Capital Market Reform Bank of Israel and the IMF

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  1. Israel’s Capital Market ReformBank of Israel and the IMF Prof. Dan Galai Sigma PCM and the Hebrew University Feb. 27 2008

  2. What Were the Objectives of the Reform? • *Lessening the dominance of the major banks. • *Enhancing competition. • *Reducing potential conflicts of interests • *Reducing operational costs to customers. • *Enhancing information flow

  3. Efficiency-What does it mean? • Three meanings of efficiency: *Allocation (Pareto) *Information *Operations The trade-offs between classes of “efficiency”

  4. How much Regulation is Optimal? -Read Stigler’s Organization of Industry His conclusion: at the end of the day regulators help the industry rather than the consumers. (e.g. the case of restrictions on investments in the QQQ). -The “shadow price” of regulation. -Not differentiating between more and less important issues.

  5. “Hermon” as a Case Study -The reform’s intention was to enhance competition. -The incentives scheme to attract “stars”. -Competition is on yields; risks are usually ignored. -Managers assume more risks to achieve higher returns and maximize their incentives! -How to align risks, returns and incentives? -Where are the control systems?

  6. On the Education of the Israeli Investor The Israeli investor- *lacks the proper education *is emotional about money *believes in real estate The Ostrich Effect Can the Regulator be the Educator?

  7. What should be done? -Find the right balance between investors protection and competitiveness in the financial markets. Avoid “corner solutions”. -More transparency -More responsibilities on board of directors (e.g. the case of “Sharei Ribit”, or, “regulatory arbitrage”). -Align the regulators and make regulation more uniform.

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