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The banking system plays a central role in every advanced economy: it is
there that the public deposits the bulk of its financial savings, which are used
by the banks to provide credit to firms and households.
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Most payments are made via the current accounts (demand deposits) which
are handled by the banks; foreign currency transactions are also usually
executed via the banks. Israel's banking system operates in other spheres,
too, administering provident and mutual funds and acting as their trustees,
administering customers' securities, functioning as custodian, underwriter,
distributor, and dealer in securities on the stock exchange, serving as
financial advisor, etc.
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This concentration of vital services, and awareness that any failure of the
banking system would seriously harm the smooth functioning of the entire
economy, necessitates supervision of the banks. This involves the following
functions:
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supervising the stability of banking corporations with a view to protecting
depositors' money;
ensuring the proper conduct of the banking corporations;
guaranteeing correct relations between the banks and their customers.
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The Supervisor of Banks
is appointed by the Governor of the Bank of Israel.
Two committees operate alongside the Supervisor:
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The Licenses Committee advises the Governor and the Supervisor on
issuing licenses to establish a banking corporation, purchase a controlling
interest in a bank, or set up bank branches. It is also consulted when legal
steps are being considered to ensure the stability of a bank where there has
been mismanagement.
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The Advisory Committee on matters concerning banking business is
consulted by the Supervisor of Banks on issuing new directives regarding
proper management.
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The tasks and authority of the Supervisor of Banks are based on several
laws:
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The Banking Ordinance, 1941, a Mandatory ordinance which has been
amended and updated over the years;
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The Banking (Licensing) Law, 5741-1981;
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The Banking (Service to Customers) Law, 5741-1981;
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The Checks Without Cover Law, 5741-1981.
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Various mechanisms serve the Banking Supervision Department in the
performance of its functions:
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Licensing procedures, and in particular permits from the Governor, are
required by a corporation wishing to be a banking corporation, and by anyone
attempting to obtain 10 percent or more of the shares of a banking
corporation. Permits are granted after a thorough investigation by the Banking
Supervision Department and consultation with the Licenses Committee. The
licensing procedures are intended to ensure banks' ability to operate, as well
as preventing elements which are unsuitable-as regards both their financial
standing and their integrity-from acting as bankers, or from owning or
substantially influencing a banking corporation.
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Setting norms and limitations: banks' activities are restricted, to ensure proper
management and risk control. Within this context, the Supervisor of Banks
may introduce provisions concerning the composition of the board of directors
of a banking corporation and its methods of operation, adequate minimum
capital requirements appropriate to the extent of the bank's risk assets,
limitations on the maximum amount which may be lent to a single borrower
and to parties connected with the bank (e.g., owners, management, etc.).
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Inspection and assessment: each bank's books are inspected and its
performance analyzed, so that its soundness can be assessed. This is also
done to ensure that it complies with the directives issued by the Supervisor of
Banks, is properly managed, and avoids unacceptable risks. On the basis of
its findings, the Banking Supervision Department takes the required steps to
correct flaws and, in serious cases, imposes sanctions on the offending bank,
as well as on its directors and managers.
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Encouraging and developing market supervision: the monitoring of the banks
and their activities by customers and the markets is an important element in
the supervision of banks. Consequently, the Bank of Israel acts to reinforce
this aspect, mainly by extending the requirement that banks disclose relevant
information on their soundness, their activities on behalf of customers, and
their charges.
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The provisions of the Supervisor of Banks regarding the format of the
financial statements which banks must publish are among the most advanced
in the world. They include the information required to analyze the bank's
development, profitability, and risks.
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The Banking Supervision Department has also extended the banks' obligation
to give customers detailed information regarding the interest rates they
charge and pay, the fees they charge for services, and the arrangements
governing the contractual association between them and their customers.
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Enquiries from the public: customers who feel that they have been mistreated
by a bank may complain to this unit. The complaint will be investigated, and
both the customer and the bank advised of the findings. If the complaint is
found to be justified, the bank is required to rectify the situation.
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Research: the Supervisor of Banks publishes research studies in the field of
banking, most of them in the Banking Review, as well as a
Working Paper Series (hebrew), and an
Annual Survey, in which developments in
the banking system are described and analyzed.
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About the Bank of Israel