This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in Israel including national authorities, regulation, licenses, organisational requirements, supervision and assets.
This Q&A is part of the global guide to Banking & Finance.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/
What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?
The main national authority for banking regulation and supervision in Israel is the Bank of Israel (the "BoI"), which regulates and supervises the licensing applicable to banking entities in Israel, subject to the Israeli Banking Law (License), 1981 ("The Banking Law"). Other laws which regulate the activity of banks in Israel are: The Banking Ordinance, 1941 ("The Banking Ordinance") and The Banking Law (Service to Customer), 1981 ("The Banking Law (Service to Customer)").
In addition, there are other banking activities in Israel which are regulated and supervised by two other authorities: Investment Advice Investment Marketing and Portfolio Management activities are regulated by the Israeli Securities Authority (the "ISA"); while some Financial Assets Services and the non - banking Credit Extension are regulated by the Israeli Capital Market, Insurance and Savings Authority (the "CMISA").
Which type of activities trigger the requirement of a banking licence?
Under the Banking Law, the following activities may only be carried out by a banking corporation licensed under the Banking Law (a "Banking Corporation"), thus trigger the requirement of a banking license:
a. accepting deposits, subject to withdrawal by cheque upon demand, in current accounts;
b. both the acceptance of money deposits from thirty persons or more at one time and the grant of credit (subject to certain exceptions); and
c. both the issuance of securities requiring a prospectus under Israeli law, and the grant of credit (subject to certain exceptions).
Does the regulatory regime know different licenses for different banking services?
While there are certain activities that may only be carried out by a Banking Corporation (as detailed above), certain banking services can be carried out under different licenses.The BOI can grant, besides a Bank license, a Mortgage Bank license, a Foreign Bank license and a Financial Institution license.
Foreign Bank License
Non-Israeli banks can operate in Israel in two basic forms: (1) obtaining a foreign banking license (2) establishing a representative office (see answer 6 below). A non-Israeli corporation which is a licensed bank in a foreign country, can receive from the Governor, a foreign banking license ("Foreign Bank"). Under the Banking Law a Foreign Bank shall engage only in the activities which are permitted to Banking Corporations in Israel.
Note that the BoI is also authorized to grant a clearing activity license for credit card companies and to monitor their activities.
Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?
The Banking Law sets out the activities a Banking Corporation may carry on in Israel. This is a closed list that defines what a bank is entitled to engage in. The list includes, inter alia:
The acceptance of money deposits in current accounts, subject to withdrawal by check upon demand; the acceptance of other money deposits; the issue of securities; maintenance of a system of payments; purchase and sale of foreign currency; the granting of credit; investments in securities; the safekeeping and administration, as an agent, bailee, dealer or trustee, and excluding the granting of underwriting obligation, the management of a provident fund, the management of a mutual joint investment fund, and management of portfolios management ;the purchase and sale of securities as a dealer or agent; broking in financial and economic transactions in the sphere of its business; pension Advice and also the performance of a transaction for a client, as these terms are defined in the Pension Advice and Marketing Law; Investment advice and Investment Marketing according to the Investment Advice Law.
A Banking license automatically permit a Banking Corporation to engage in the activities detailed in the list above. Investment Advice services are included in the list above, but are also regulated in the Investment Advice Law. Generally, under the Investment Advice Law, a bank, and any other Banking Corporation which is authorized to do so pursuant to the Banking Law may engage in Investment Advice without obtaining a license; however, those engaging in Investment Advice on behalf of the bank must be employees of the bank or Banking Corporation, who are either licensed advisers or authorized to engage in Investment Advice without a license pursuant to the Investment Advice Law. Note, that the Investment Advice Law prohibits banks themselves from engaging in Portfolio Management activities (however they may control a separate portfolio management company). As for Brokerage activities and performance of clients transactions, those activities are not regulated, and do not require licensing, as of today in Israel. Regarding custody services, there are recommendations of an inter-ministerial committee for "Custodian Services in the Israeli Capital Market" that were published on 2011 and were adopted by the Bank of Israel on 2013. The main purpose of these recommendations is the protection of client assets, inter alia, in cases of insolvency of the custody agent.
What is the general application process for bank licenses and what is the average timing?
The Governor, together with the licensing committee, has the authority to grant a banking license.
The general process of bank licensing includes 4 main steps:
a. Pre Filing – submission of the bank general plan for a principal approval.
b. Application Process - submission of the bank detailed plan for a practical approval.
c. Organization Phase – practical preparation to establish a new bank, including a POE (Pre-Opening Examination) by the Supervisor.
d. Final Approval – after the correction of errors, identified during the POE, and after obtaining a Controlling Shareholder Permit, as detailed below, the granting of a bank license.
The minimum timelines of the process mentioned above estimated at 2 years at least. Please note that there are no recent precedents for a new bank license.
Is mere cross-border activity permissible? If yes, what are the requirements?
In analyzing the possibility of non-Israeli banks, which are not licensed as banks by the BoI ("Non-Israeli Banks"), to engage in cross border activity in Israel, it is worthwhile to consider each type of activity separately, since different activities are subject in Israel to separate regulations with separate regulators.
Banking Services - As for traditional banking services, such as bank accounts, deposits and credit/loans, Non-Israeli Banks, which are not licensed by the bank of Israel, cannot engage in these banking activities in Israel (namely, in simultaneous acceptance of deposits and extension of loans). When acting on cross border basis, Non-Israeli Banks can offer to provide such services from out of Israel either: (1) through remote communications from abroad, or allow employees to travel into Israel and refer potential clients to the Non-Israeli Bank abroad; or (2) by establishing a representative office in Israel (either as an office of the foreign entity or through incorporation of an Israeli subsidiary). Both types of activities do not require a license from the BoI if they are limited in Israel to provision of information about such services or performing certain activity related to accounts (such as transferring documents or assisting in KYC). Establishing a representative office in Israel generally does not require licensing from the BoI. However, under the Banking Ordinance, no person or entity other than a licensed bank shall use the word "bank" or any of its derivatives in the name under which it is carrying on business, without the consent of the Governor. Thus, the BoI uses this authority when allowing non Israeli banks to open local representative office in Israel, and use the word "bank" while carrying on business in Israel. Generally, a representative office is permitted to solicit clients in Israel to open accounts outside of Israel and to provide information about banking services. It is not allowed, among other things, to engage in activities allowed only to Banking Corporation in Israel. The BoI issued a general permit allowing the use the word "bank" in the name of a representative office in Israel of a Non-Israeli Bank incorporated and licensed in a country that is a member of the OECD organization. The general permit is subject to certain conditions.
Loans/Credit and Services in Financial Assets – such services are regulated by the CMISA, and are pursuant to the Financial Services Law. CMISA recently published draft regulations according to which the license requirement shall not apply, among other things, in case of a foreign entity incorporated in a foreign country which is an OECD member and holding a banking license obtained from a supervisory entity in an OECD country.
Advisory and Portfolio Management (discretionary) Services – Such services are regulated by the ISA and are pursuant to the Israeli Investment Advice Law. In general, provision of such services in Israel, requires a license unless any of the exemptions provided under the Investment Advice law apply. In addition, this law prohibits the offering of such services in Israel if they are to be provided without a license from the ISA (when none of the available exemptions apply).
In light of the above, the ISA published its position stating that the Investment Advice law applies even when part of the service is provided in Israel. According to the position, if all of the following conditions are met, the Investment Advice Law will not apply to a foreign entity rendering such services to an Israeli person: (1) The business relationship was established outside of Israel or was initiated by the client residing in Israel, and the service provider did not solicit the client in Israel; (2) the account is managed outside of Israel; and (3) meetings are not held in Israel. In addition the ISA published several pre-rulings regarding specific circumstances.
What legal entities can operate as banks? What legal forms are generally used to operate as banks?
Under the Banking Law, the BoI is authorized to grant various bank licenses to Israeli corporations except for foreign bank licenses which can be granted to a corporation incorporated outside of Israel, acting as a bank in its origin location. Currently, Israeli banks are organized as limited liability companies. In theory, a bank may take the forms of other types of corporations such as a cooperative society. When a Non-Israeli bank obtains a foreign bank license from the BoI, it is not required to incorporate a legal entity in Israel. Typically, the license is granted to the foreign bank entity, and allows it to open a branch in Israel.
What are the organisational requirements for banks, including with respect to corporate governance?
The BoI issued "Proper Management of Banking" directives ("PMB") which impose corporate governance and organizational requirements on bank.
PMB 301 deals with the board of directors and, among others, addresses the following matters: functions of the Board of Directors and its powers; issues that the board must consider and decide on; supervisory and monitoring role; board committees; frequency of board meetings including presence requirements for board members; certain meetings without the management of the bank; chairman of the board; practices for effective functioning of the board; reports to the BoI etc. As to the composition of the board, the directive sets out among others: limitation on the minimal and maximal number of members, eligibility to serve as a director and conflict of interests, at least third of directors should be independent (external directors); at least third of directors should have “banking experience”, at least a fifth of directors should have “accounting and financial expertise”, at least half of directors should have general professional qualification, and at least one director will have proven knowledge and experience in information technology.
Other PMBs address different organs and functions in the bank such as the chief accountant, the external auditor, the internal auditor function, the compliance functions, the risk management, the ombudsman etc.
Do any restrictions on remuneration policies apply?
Israel has an extensive legislation regarding remuneration policy and restrictions on remuneration of senior officers, in particular with respect to financial and banking corporations.
According to the Companies law, banking corporations, which are publicly traded companies, are required to adopt a remuneration policy for their senior officers. The remuneration policy needs to take into account certain considerations as stipulated in the Companies Law, inter alia, regarding the company's objectives; the company's long term strategy; the company's risk management policy; the company's size and nature of operation, etc. In addition, the remuneration policy needs to include references to certain matters and guidelines with respect to variable terms of employment (cash and equity), retirement grants, the relationship between the senior officer's remuneration and the remuneration of other company's employees, etc. The Companies Law stipulates that the board of directors shall approve the remuneration policy following the recommendation of the remuneration committee and the approval of the shareholders by a special majority (50% of the shareholders who are not the controlling shareholders and who have no personal interest). Under special circumstances, the remuneration committee and the board of directors may approve the remuneration policy despite the objection of the company’s shareholders.The Companies Law also sets provisions regarding the approval of remuneration for senior officers.
A new Remuneration Law, enacted in 2016, includes extensive restrictions regarding remuneration on banking corporation. The Remuneration Law was challenged in the Supreme Court of Israel, which upheld it as constitutional. The Remuneration Law applies to "Financial Corporations" which include various financial institutions such as banking corporation and in certain circumstances their controlling corporations, but excludes foreign banks and other foreign financial bodies. According to the Remuneration Law, remuneration to senior officers or employees of a Financial Corporation paid to them in connection with their employment both by the Financial Corporation and by its affiliates, for which the projected expense calculated as of the date of the approval of the remuneration in accordance with GAAP, is expected to exceed NIS 2.5 million per year, may not be approved unless the ratio between (i) such expected expense (on a full time basis), and (ii) the expense for the lowest remuneration paid (on a full time basis) by the Financial Corporation to its employee, directly or indirectly (including to a person employed by a manpower contractor or a services contractor), during the year prior to the approval (the "Employee Ratio"), is lower than 35. This is an absolute cap on the remuneration (with no exemption).
Subject to compliance with the Employee Ratio, the approval of remuneration to senior officers or employees of a Financial Corporation, exceeding NIS 2.5 million per year, shall require a strict approval mechanism. Engagement with respect to Remuneration, which was not approved in accordance with the Remuneration Law, shall not be valid for both the Financial Corporation and the senior officer or employee. In addition, according to the Remuneration law, in general, any expense regarding the remuneration of employee of a Financial Corporation exceeding the sum of NIS 2.5 Million per year shall not recognized as remuneration expanses for tax purposes.
PMB 301A, issued by BoI, applies to banking corporations and to their subsidiaries. The 301A Directive is based mainly on the FSF/FSB documents, on the "Principals for Sound Compensation Practices and Implementation Standards, Basel Committee recommendation (January 2010), Compensation Principles and Standards Assessment Methodology" and the European Directive 2013/36/EU. According to the 301A Directive, the banking corporation's board of directors is required to determine, at least once every three years, a remuneration policy for all of its employees, as well as principles for the remuneration policy in its subsidiaries. The remuneration policy shall apply to all employees, focusing on Key Employees. The 301A Directive also sets restrictions, mainly regarding the remuneration for Key Employees. Such restrictions includes, among others, that the maximum variable remuneration shall not exceed 100% of the fixed remuneration (subject to extraordinary circumstances); claw back provisions ;deferral arrangements attributed to a Key Employee granted for a calendar year; restrictions regarding payment of variable component for directors etc.
Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
On May 2013, the Bank of Israel issued a series of guidelines under the PBC Rules, to be used to implement the global regulatory framework for more resilient banks and banking systems issued by the Basel Committee on Banking Supervision in the Basel III framework. The implementation of the Basel III Rules in Israel was principally defined in PBC Rule 202 which adopts the Basel III Rules in Israel, and sets forth the necessary adjustments to the then-existing PBC Rules, which dealt with capital requirements and calculations for Israeli banking institutions, as well as the introduction of additional new rules such as the requirement s for liquidity coverage ratios (dealt with in greater detail below).
The regulatory capital requirements set forth by the Bank of Israel in the PBC Rules are based on four underlying principles:
- The banking institution should have a proper process in place which will enable the estimation of its general capital adequacy in relation to its risk profile as well as a strategy to maintain its capital levels.
- The Supervisor of Banks shall review and estimate the internal capital adequacy and strategy of the banking institutions as well as their ability to monitor the regulatory required capital ratios in order to ensure compliance therewith. The Supervisor of Banks shall apply its supervisory authorities and powers where it shall not feel comfortable with the findings of such review.
- The Supervisor of Banks expects the banking institutions to be in a situation in which their capital levels shall be above the minimal regulatory requirements and it will be able to require that banking institutions maintain higher capital levels than those minimally required according to the PBC Rules.
- The Supervisor of Banks shall interfere, in early stages, in order to prevent a decrease in the capital levels below the minimum requirements which are applicable in connection with the risk profile of a specific banking institution and it will require remedial actions where the capital levels are not maintained or their previous levels are not recovered.
The PBC Rules set forth very elaborate and detailed guidelines and instructions as to the processes and procedures which should be implemented by the banking institutions in order to assess and maintain their capital requirements.
The PBC Rules in connection with the Basel III minimal capital requirements generally apply to banking institutions in Israel (other than foreign banks) and to credit card companies. The capital requirements differentiate between the total regulatory capital requirements and the Tier 1 capital requirements for banking institutions of which the balance sheets comprise 20% or more of the total balance sheet assets of banking institutions in Israel (currently the two largest banks in Israel; such are required to maintain 13.5% and 10% ratios, respectively), and those whose balance sheets are smaller (which are currently required to maintain 12.5% and 9% ratios, respectively). The Supervisor of Banks is authorized to set forth higher minimal ratios for specific banks.
Are there any requirements with respect to the leverage ratio?
The Bank of Israel Proper Banking Conduct Rule 218 implements the requirements from banking institutions to calculate their leverage ratio, namely the ratio between their Tier 1 capital and their exposure levels. Generally, following the implementation of the Basel III Rules Israel transferred from a policy of reviewing the total capital adequacy to a policy of being focused more on the Tier 1 capital.
The exposure levels will generally be calculated in accordance with the accounting principles, with certain exceptions (primarily: (a) certain adjustments to the calculations of balance sheet exposures and non-derivative items; and (b) the prohibition on setting off loans and deposits). Furthermore, PBC Rule 218 includes elaborate instructions and guidelines as to the methods of calculating the leverage ratio, the items which are to be included as well as the items which may, or should, be set-off or disregard when making the calculations.
As of this date, the minimum leverage ratio of banking institutions in Israel whose balance sheets comprise 20% or more of the total balance sheet assets of banking institutions in Israel (currently the two largest banks in Israel) is 6% and for all other banking institutions – 5%.
What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
The Bank of Israel Proper Banking Conduct Rule 221 implements liquidity requirements from banking institutions. PBC Rule 221 generally adopts the Basel III Rules in connection with the liquidity coverage ratio (LCR) while setting minimum liquidity requirements for Israeli banking institutions and authorizing the Supervisor of Banks to set forth higher requirements with respect to specific banking institutions if it finds that the current liquidity requirements are insufficient in connection with the liquidity risks faced by such certain banking institutions. The liquidity requirements apply to all banking institutions with a certain differentiation between banks on a stand-alone basis and banks which are a part of a jointly controlled banking group. PBC Rule 221 elaborates on the details and methods of calculation of the LCR.
Under PBC Rule 221, the LCR minimal requirement for Israeli banking institutions became effective on April 1, 2015, when it was set at 60%. The LCR minimal requirement increased to 80% in January 1, 2016 and to 100% in January 1, 2017, the level it is in as of this date.
Do banks have to publish their financial statements?
In general, the financial reports of banking corporations and credit cards companies owned by them in Israel, are in accordance with the accepted accounting principles (Israeli GAAP), and in accordance with the Supervisor Reporting to the Public Directives, which requires them to publish annual and quarterly financial reports. With concern to most topics, these Directives are based on accepted accounting principles of U.S. banks, while other less significant topics are based on international financial reporting standards (IFRS) and on Israeli GAAP. Public companies in Israel are required to publish reports in accordance with the Securities Law, 1968, and regulations promulgated thereunder, which are regulated by the ISA. While banking corporation, which are public companies, publish their annual and quarterly reports under the Reporting to the Public Directives issued by the Supervisor as mentioned above, they are still subject to certain regulations according to the Securities Law, including publishing immediate reports regarding any material event or event that could significantly affect the price the the Company's securities.
Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?
With respect to banking corporations, the BoI recognizes the need to consider banking group consideration, for purposes of stability, risk management and exposure. Therefore, in several PMB's issued by the BoI, it is stipulated that the banking corporation's board of directors will take into account in its policy and strategy the banking corporation's group structure, and the ability to control and manage risks in the group. Similarly, the risk management policy of the banking corporation should take into account its subsidiaries and the board of directors shall determine general instructions for corporate governance and control in the banking corporations' subsidiaries including subsidiaries and branches outside of Israel.
For that purpose, the board of directors of a banking corporation is required to create a supervision mechanism, which will ensure fluent transfer of information and ensure that the banking corporation internal auditor shall receive all required information, on his discretion, which will allow him to conduct examinations and other procedures in other corporations in the group. In addition, the banking corporation's audit committee is required to refer to the suitable scope of internal audit in the banking corporations' subsidiaries and to recommend it to the board of directors.
What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?
Permit requirement for acquisition of shareholdings or control
The Banking Law imposes certain restrictions on holdings in banks (and bank holding corporations) beyond certain thresholds. Holding of any type of shares (or any other means of control such as the right to nominate directors) above 5% requires a permit from the Governor of the BoI (in advance). In addition, a person cannot coordinate its voting for the nomination of a director in a bank with another person without a permit. The Banking Law also sets out that no person shall control a bank unless it obtains a permit from the Governor of the BoI.
Reporting Requirements on Holdings in a Banking Corporation
A shareholder holding more than 5% of the shares (or any type of the means of control) in a bank has to report its holdings to the bank. Such report shall include, among other things, the person for whom such holder acts as agent or trustee, and in case the holder is a corporation – its controlling shareholders and anyone holding more than 5% in such corporation. The report shall be delivered annually (on April 1) and on any other dates determined by the BoI. In case of a bank without a controlling stake (i.e. no shareholder in the bank needs a permit for control from the BoI) the reporting threshold is 1% (instead of 5%) and the report is required each time this threshold is crossed.
In case the bank is also a public company (its shares were offered to the public), additional reporting obligations to the bank apply pursuant to the Israeli securities law and regulations.
Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?
Under the Banking Law in considering whether to grant a person with a permit holding or a permit control in a bank, the BoI has to take into account, among other things, the adequacy of the applicant to control or to hold the amount of shares requested, its business experience, its occupation and other business, its financial strength and integrity, the consequences of the permit on the current or future control over the bank; the plans of the applicant; the policy; public interests etc.
The BoI published a policy regarding the criteria for granting control permit in a bank. We note that not all existing control permits (most of which were issued before the policy) comply with the criteria and in addition the BoI may deviate from the criteria.
According to the policy in addition to the above considerations the BoI shall also consider the applicants personal and business integrity; investment strategy; potential conflict of interest with the bank. The policy addresses the requirement for a stable and permanent controlling core in the bank. The policy also sets out restrictions on how the means of control in the bank are held. The financial strength of the applicant will be checked with respect to different parameters. The main criteria are the ratio between the equity of the ultimate controlling shareholder (assets minus liabilities) and the value of the controlling stake which should be at least 150% (or 250% for small banks). Each controlling shareholder will be required to have additional equity of 100% from the means of control it purchases beyond the controlling stake.
Are there specific restrictions on foreign shareholdings in banks?
There are no explicit restrictions under Israeli law on foreign shareholdings in banks. In the past, certain foreign shareholders (foreign banks and foreign individuals) received permits from the BoI to hold control in banks in Israel. The abovementioned policy, which was published by the BoI regarding the criteria for granting control permit in a bank, addresses the possibility of foreign shareholders to obtain a permit to control a bank.
Is there a special regime for domestic and/or globally systemically important banks?
There is no special regulatory regime for domestic systemically important banks, although certain banking regulation are applied differently on large Israeli banks.
What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?
The sanctions the regulator can order in the case of violation of banking law provisions include criminal investigation (although BoI does not have criminal investigation powers itself but rather depends in the police and the Ministry of Justice), fines and other monetary sanctions, and in certain situation the ability to appoint a trustee for one's holdings in a banking corporation.
The sanction the regulator can order in case of a breach of PBC Rules include administrative sanctions and the ability to force banks to include provisions in its books.
BoI has also the power to ask in extraordinary situation the termination of an officer or a director in a bank.
Other relevant regulators like the ISA may inflict criminal and administrative sanction for corporations and individuals.
What is the resolution regime for banks?
Unlike other jurisdictions, the Israeli financial sector was less vulnerable to the recent global financial crisis and therefore the Israeli government was not required to bail-in any of the banks.
In terms of resolution of a bank the Banking Ordinance and the Bank of Israel Law provide the BoI with various powers and tools. For example in case the BoI believes that a bank has acted in a manner that might impair its ability to fulfill its obligations or its proper conduct, it may send order to take certain measures, instruct the bank to avoid any type of activity, ban distribution of a dividend and limit the authority of a board member or an officer or remove him from office. In case a bank is not able to fulfill any of its obligations or return any assets that was deposited with it, the BoI may in certain circumstances, appoint an authorized manager for the bank or to supervise its management.
In considering the stability of a bank the BoI may provide it with funds by discounting bills of exchange, promissory note or by collateralized loans. Moreover, the BoI may, with the approval of the Government of Israel, announce that the BoI or another bank shall guarantee another bank's deposits (up to the full amount or up to a certain amount). Such guarantee may cover also other liabilities if it is for the benefit of the public.
How are client’s assets and cash deposits protected?
In general, there is no specific legislation in Israel that regulates the status of clients' assets in the event of an insolvency exist.
In addition to the BoI authority to guarantee certain deposits or liabilities as mentioned under question 22 below, we note that in recent years the BoI is considering the advantages and disadvantages of a deposit insurance mechanism and the need and possibility of implementing it in Israel.
As for securities held by clients, there are certain laws and directives, including the rules and bylaws of Tel Aviv Stock Exchange (TASE) and of the Tel Aviv Stock Exchange Clearing House, which mainly address the issue of custody services which guarantee certain separation between assets of the clients and assets of the bank.
Since under the Bylaws a TASE member viewed as holding securities for its client in trust, then under the concept of Israeli Trust Laws, it seems that those securities are not considered as part of the assets of the TASE member i.e. the bank.
Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
Under PMB published by the BoI, certain “contingent convertible” capital instruments issued by a bank may be included in its tier 1 and tier 2 capital if they meet certain conditions. Among others, under the terms of such instruments in case of a trigger event for non-viability such instruments will be converted to equity or will be written off.
Is there a requirement for banks to hold gone concern capital (TLAC)?
Under the PMB there are certain rules and requirements in connection with the calculation of Tier 2 capital, namely gone-concern capital. Such rules, among others, include guidelines as to which items may be included in Tier 2 capital, how are they to be calculated, which items may be set-off, and so on. It should further be noted that following the implementation of the Basel III Rules, Israeli banks issue less capital notes which form Tier 2 capital. In addition, Israeli banks have recently begun issuing contingent convertible (CoCo) bonds. Such bonds are deemed Tier 1 capital for regulatory purposes, due to the fact that their terms enable a compulsory conversion to equity in certain circumstances or the termination of the interest obligations and the deferral of the principal repayment.
In your view, what are the recent trends in bank regulation?
The recent trends in banking regulation in Israel include the reforms already legislated like the "Shtrum Reform" which will separate between the two leading Israeli banks and their controlled credit card companies. The reform shall change the credit card industry in Israel and shall force these banks to issue new credit cards through other companies and to execute new credit card issuance agreements with the other credit card companies. We shall face also other reform announced recently which shall aim to lead to more competition in the banking sector, the adoption of new fintech technologies and also the competition from new fintech companies.
The Israeli banks are implementing efficiency plans which shall be resulted in lowering their numbers of employees and branches.
The banks will have also to implement the CRS regulation to check and report the tax status of their clients, which shall continue the efforts and investments they made as to FATCA regulations.
What do you believe to be the biggest threat to the success of the financial sector ?
We think the biggest threat (and opportunity) is the advance of technology in the financial sector, which is enabled by the growth of the Fintech industry in the world and in Israel. The banks face a competition not only from the traditional financial sector players, but also from new (and less regulated) technology companies, with respect to services like money transferring, payments, and investment management.
Banks in Israel hold historic financial power because of their daily personal relationship with clients, including retail clients, and the comprehensive information they have about their clients. Since efficiency plans require the banks to close branches and release employees, this competitive advantage may be lost over time.