Israel ’ s Banking System, Annual Survey 2006 Rony Hizkiyahu, Supervisor of Banks Bank of Israel September 5, 2007

Israel ’ s Banking System, Annual Survey 2006 The banking system in Israel The banking system in Israel Activities of the Banking Supervision Department Activities of the Banking Supervision Department

The banking system in 2006 Continued improvement in the banking system ’ s robustness Continued improvement in the banking system ’ s robustness The challenges facing the banking system The challenges facing the banking system The banking system ’ s readiness to meet the challenges The banking system ’ s readiness to meet the challenges

Improved robustness of the banking system Increased yields and net profits, mainly due to one-off capital gains Increased yields and net profits, mainly due to one-off capital gains Sharp drop in loan-loss provisions (problem debt is still large) Sharp drop in loan-loss provisions (problem debt is still large) Slight rise in capital adequacy (but this is still lower than the norm in the advanced economies) Slight rise in capital adequacy (but this is still lower than the norm in the advanced economies)

Risk-Weighted Capital Ratio of the Banking Major Groups, 1999 to June 2007

Challenges facing the banking system Reduction in traditional banking intermediation Reduction in traditional banking intermediation No growth in business credit — funds raised in capital market No growth in business credit — funds raised in capital market Alternatives to deposits for the public outside the banking system Alternatives to deposits for the public outside the banking system Changes in the composition of income and expenditure Changes in the composition of income and expenditure Increased expenditure Increased expenditure The threat of reduced fee income The threat of reduced fee income

The banking system ’ s response to the challenges Creating alternative sources of income Developing innovative financial instruments Developing innovative financial instruments Expanding credit-card activity Expanding credit-card activity Increasing income from financial activities Increasing income from financial activities Expanding activities abroad Expanding activities abroad Entering the business of pension advice Entering the business of pension advice Streamlining the banking system Continuing trend of mergers and privatization of mortgage banks and small banks Continuing trend of mergers and privatization of mortgage banks and small banks Adopting new technologies and shifting to electronic banking Adopting new technologies and shifting to electronic banking

Activities of the Banking Supervision Department Objectives of Banking Supervision Maintaining the stability of the banking system Maintaining the stability of the banking system Implementing Basel II Implementing Basel II Boosting competition and efficiency in the banking system Boosting competition and efficiency in the banking system Maintaining fair practice in bank-customer relations Maintaining fair practice in bank-customer relations

The objectives of the Banking Supervision Department Basel II - Aims Improving the stability and soundness of the banking system Improving the stability and soundness of the banking system Creating uniformity and credibility and adjusting to the international system Creating uniformity and credibility and adjusting to the international system Moving toward risk-focused management Moving toward risk-focused management Corporate governance — implications for banks ’ management Corporate governance — implications for banks ’ management

The objectives of the Banking Supervision Department Basel II – Banking Supervision ’ s plans for implementation The objectives of the Banking Supervision Department Basel II – Banking Supervision ’ s plans for implementation 30 January 2007 — Declaration of Israel ’ s adoption of the Basel II Accord 30 January 2007 — Declaration of Israel ’ s adoption of the Basel II Accord Setting date set for full implementation — end 2009 Setting date set for full implementation — end 2009 Drawing up joint work schedule with the banks Drawing up joint work schedule with the banks Follow up and support for the implementation of Basel II in Israel Follow up and support for the implementation of Basel II in Israel

The objectives of the Banking Supervision Department Stability of the banking system Emphasizing management of processes at Board of Directors level Emphasizing management of processes at Board of Directors level Encouraging the banking system to increase its risk-weighted capital ratio Encouraging the banking system to increase its risk-weighted capital ratio Directives on managing impaired debts Directives on managing impaired debts

The objectives of the Banking Supervision Department Encouraging competition in the banking system The objectives of the Banking Supervision Department Encouraging competition in the banking system Concentration in the banking system Concentration in the banking system Competition in the financial system Competition in the financial system The non – bank market The non – bank market Ways to encourage competition: Ways to encourage competition: Short term – Banking Fees Law, enhancing transparency and facilitating the move from one bank to another Short term – Banking Fees Law, enhancing transparency and facilitating the move from one bank to another Medium term – developing financial instruments, securitization, and REPOs and direct banks Medium term – developing financial instruments, securitization, and REPOs and direct banks Long term – foreign banks Long term – foreign banks The image of the banking system The image of the banking system

The objectives of the Banking Supervision Department Bank-customer relations The objectives of the Banking Supervision Department Bank-customer relations Reinforced bank-customer relations Reinforced bank-customer relations Banking (Service to Customer) Law (Supervision of Fees) Banking (Service to Customer) Law (Supervision of Fees) Discovering system flaws Discovering system flaws Consumer-oriented directives — credit facilities, mortgages, facilitating the move from bank to bank Consumer-oriented directives — credit facilities, mortgages, facilitating the move from bank to bank Informing the public — transparency, explanation and assistance on consumer matters via the Bank of Israel website Informing the public — transparency, explanation and assistance on consumer matters via the Bank of Israel website

Thank you