| The financial system occupies a central position in the economy; its efficiency and stability are therefore essential for economic development and for the realization of the economy's growth potential. |
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| The financial system comprises three components: |
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The financial institutions, with the banking system in the center, and encompassing institutional investors (pension funds, insurance companies, provident funds and further education funds) and other financial entities (portfolio managers, underwriters, consultants, etc); |
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The financial markets-the money market, foreign-currency market, stock market, bond market, and derivatives market; |
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The payments and clearing systems. |
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| Responsibility for the stability of the banking system lies with the Banking Supervision Department in the Bank of Israel. Responsibility for the stability of the other financial institutions lies with the Commissioner of the Capital Market, Insurance and Savings in the Ministry of Finance, and the Securities Authority is responsible for the proper functioning of the stock market. Maintaining the stability of each of the separate components of the financial system does not itself ensure the stability of the whole system; what is required is an overall view of the system. This is due to the increased sophistication of the financial markets, their close interdependence, the mutual relations between the different types of financial institutions and between them and the financial markets, the complex dynamic processes within the financial system and the instantaneous effects of external shocks on its different components. |
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| Various global developments led to increased awareness of the importance of maintaining financial stability: international financial markets developed, the field of information technology, communications and computerization was revolutionized, the liberalization process in financial systems and regarding cash flows intensified, integration of financial markets throughout the world strengthened, and there was a worldwide outbreak of financial crises that caused severe damage to a significant number of markets. |
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| International organizations, and particularly the IMF, have expanded their activity in the field of stability of financial systems. In some countries responsibility for overall financial stability was clearly defined as an important function of the central bank, together with price stability, and the central banks of several countries established units to monitor and analyze financial stability. The targets, instruments and work procedures of the central banks in this area are currently being defined and formulated in many countries. |
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| In the Bank of Israel, following the work of the team that had examined the subject since the middle of 2001, a new entity, "Financial Stability," was established in mid-2003. Its function is to promote the stability of the financial system in Israel by: |
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promoting reforms in the infrastructure of the financial markets and financial institutions; |
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formulating policy recommendations in this sphere; |
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developing tools that will enable the anticipation, prevention and resolution of financial crises; |
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gathering and analyzing data on the financial system, and constant monitoring of developments in it, focusing particularly on risks; |
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coordinating with other supervisory authorities and entities; |
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representing the Bank of Israel in contacts with international organizations involved in the subject; |
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studying, researching and promoting knowledge of the subject; |
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publishing data,
reviews
and research of the subject. |
About the Bank of Israel