1. Regulation of the Capital Market*
Avi Ben-Bassat, Sharon Blei, and Asher Blass
* The full report in Hebrew, including a detailed abstract in English, is available at

2. The Criterions The goals. The authorities and independence needed.
For and against locating supervision of banks in the central bank.
Conflicts of interest in the activity of regulators under the MOF.
The global trend.
Israel’s financial market structure.

3. The 5 Supervisors and the supervised bodies
Banking Department
Securities Authority
Capital Market, Insurance & Savings Division
Anti-Trust Authority
Insurance
Savings
Insurance Companies
Pension Funds
Insurance agents
Money Changers
Banking
Institutions
Listed Companies
Stock Exchange
Underwriters
Mutual Funds
Investment Advisors & Portfolio Managers
Competition in the various markets
Providence
Funds

4. The Goals of Regulation & Supervision
Protection of consumers’ interests
Intermediate Goals:
Financial stability
Market efficiency
Competition
Reducing conflicts of interest

5. Regulators’ Independence Index, 2005 Capital Market & Savings Division%
Banks
Securities
Capital Market & Savings Division
Anti-Trust
Capital
Insurance
1. Source of Authority 15 5 4
2. Managerial
Independence 20
4.6
3.2 1
1.8
3. Licensing and
Regulation
4. Enforcement:
a. Information
17.5
1.9
4.3
1.3
b. Feedback
4.2 3
5. Punishment Power
3.1
2.8
3.7
Average Grade
4.0
3.6

6. Capital Market & Savings Division
Inputs and output, 2003
Banking Department
Securities Authority
Capital Market & Savings Division
Anti-Trust Authority
Supervisors
152
121 73 60
Budget
(in Million NIS)
81.4
70.5
22.2
17.8
Employees supervised
(in thousands) 40 14 23 -
Assets supervised
(in Billion NIS)
443
404
424

7. Capital Market & Savings Division
Input-Output Ratios, 2003
Capital Market & Savings Division
Banking Department
Securities Authority
Supervisors/Assets supervised
1.00
1.99
1.74
Supervisors/Employees supervised
1.19
2.73
Labor Input/Assets supervised
3.39
3.18
Labor Input/Employees supervised
2.02
4.98
Budget/Assets supervised
3.51
3.33
Budget/Employees supervised
2.08
5.23

8. The Benefits of Locating the Bank Supervision in the Central Bank
May benefit from the prestige and reputation of the CB.
May solve financial crises faster, since the CB is the lender of last resort.
Both monetary policy and banks’ supervision may benefit from exchange of information .

9. Separating the Bank Supervision Department from the BOI
Conflicts of interest between the banks’ stability and competition.
It also impairs the transmission mechanism of the monetary policy, and therefore its effectiveness.
The Bank Supervision Department hasn’t benefited from being located in the BOI in managing financial crises.
Israel belongs to the developed countries. Most of them have separated the banks’ supervision from the central bank.

10. The location of Banks’ supervision
(70 countries, 2004)
Per Capita Income
($, PPP)
Only in the CB
Outside the CB
Only in the Monetary Institution
Outside
the Monetary Institution
+30,000 1 12 13
29,900 – 20,500 10 2 5 7
20,400 – 10,300 8 6 4
10,200 – 6,000
2,700 – 5,900
Total 34 33 24 43

11. Conflicts of interest between economic policy and financial supervision in the MOF
The stability of pension funds versus labor market policy.
The stability of insurance companies versus cross subsidization policy.
The stability of financial institutions versus the price of financing government debt.

12. The share of independent authorities
2004 vs (percent)

13. Alternative Regulatory Structures
Multiple authorities by industry:
Banks ; Securities ; Insurance
Multiple authorities by function:
Prudential supervision
Conduct of business
A single regulatory authority

14. The Advantages of a Multiple Authority
Greater specialization
Competition among supervisors
Prevention of excess power
Avoidance of risk inherent in the reform process

15. The Advantages of the Unified Authority
A comprehensive view of the regulated institution.
Equality in the regulation & supervision of similar activities.
Flexibility in regulation and ease of coordination.
Economics of scale and efficiency.
Focusing of responsibility and accountability.

16. 30 Countries has reduced the number of authorities
From 3
to 2
From 2
to 1
Australia
Bulgaria
Canada
Luxemburg
Mauritius
Mexico
Netherlands
Austria
Belgium
Bermuda
Denmark
Gibraltar
Ireland
Iceland
Sweden
Malta
Norway
Poland Singapore
Slovakia
South Korea
Taiwan
Czech Rep.
England
Estonia
Germany
Hungary
Kazakhstan Latvia
Liechtenstein 7 8 15

17. Regulatory Structure in 79 Countries Pre and Post Reform
Several
Regulatory
authorities
Two regulatory authorities
Single regulatory authority
Securities &
Insurance
Banks &
Banks & Securities 28 6
10* 5 30
Current
Situation 49 7 8
Before
the
reform
*The Netherland is classified by prudential and conduct of business supervision.
Source: Courtis (2004) and the Israel Democracy Institute.

18. The Main problems in Israel’s Structure
Considerable variance in regulatory and supervisory authorities.
Significant differences in managerial independence.
Marked differences between regulators’ resources.
Potential conflicts of interest between monetary policy as well as competition and bank supervision.
Potential conflicts of interest between MOF policy and the activity of the regulator located in the MOF.
Similarity of financial institutions and scale of activities increased after Bachar’s reform.

19. Financial Services Authority
Chairman
Banking Unit
Securities Unit
Insurance Unit
The BOI shall be responsible for the stability of the financial markets.

20. Unification Alternatives
A federative authority composed of 3 industries departments.
A single authority like the FSA in GB.
Twin Peaks Model:
Prudential supervision department
Conduct of business department

21. Thank you!
* The full report in Hebrew, including a detailed abstract in English, is available at