Efforts by the Bank of Israel and Ministry of Finance to increase competition in the banking sector is moving up a gear. The joint team of financial regulators, headed by the Supervisor of Banks Daniel Hahiashvili, and the Budget Commissioner Yogev Gradus has submitted the interim conclusions for public comments.
Their ambitious aim is to complete the legislative and regulatory procedures by the end of 2025, and bring in a number of "new banks" in 2026. The conclusions are supported by Minister of Finance Bezalel Smotrich, although he has told "Globes" he believes "it will take two to three years for the market to complete the work."
The planned steps are based on two trends identified by the financial regulators. Firstly, credit to small and medium-sized businesses is highly concentrated and is almost completely controlled by the banks. The Ministry of Finance and the Bank of Israel would like to see greater competition, as well as lower interest rates.
Secondly, in their opinion, passing on interest rates hikes to customers with deposits is too slow and insufficient. They want to see higher interest rates on deposits that are passed on more quickly to customers.
The model of the team led by Gradus and Hahiashvili is the Bachar Committee, which came into effect 20 years ago, with the aim of increasing competition for banks on large credit.
The report says, "Despite the low level of competition, the banking system remains the main arena for the retail sector to obtain credit, partly due to the fact that, unlike non-bank credit providers, the banking system enjoys the possibility of raising sources at a reduced cost. While banks are allowed to raise deposits from the public, including balances in current accounts, and provide credit from them, non-bank credit providers are often dependent on lines of credit from banks or on the issuance of bonds and securities for their sources of funding."
How will it work?
The Bank of Israel will allow an entity that wishes to do so to obtain a lean and modular license that will allow it to de facto become a kind of small bank. In principle, there is no limit on the entities that can receive this license, as long as they meet the regulatory conditions, such as equity and liquidity.
The result will be that institutional entities, which until now have been prohibited from providing banking services, will be able to enter this field under certain restrictions. Credit card companies will also be able to offer deposits under the framework of this license, as will large business companies such as marketing chains, as is already the case in the lending sector.
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"There are clear rules regarding the question of who can receive a bank license. The criteria are fixed and clear, and there is no restriction on retail companies or credit card companies, for example," explained Gradus and Hahiashvili. "The restrictions that will be there are regulatory ones that are relevant to banks. For example, if you want a license, you must establish a separate company. Rami Levy, for example, will have to establish a separate company and comply with all sorts of rules. If we don't take any risks, there will be no competition here. We want them to compete with the big banks." Institutional entities will be subject to a holding limit of up to 2.5% of total assets in the banking system in the first stage. In addition, entities that receive a license will be prohibited from engaging in investment advice. The report noted that the restrictions currently imposed on real entities in the Concentration Law will remain in place.
Timetables and targets
Hahiashvili and Gradus say, "From the tests we conducted with companies that were interested in the move, we expect to see quite a big boost in the deposit sector, and the same goes for the credit sector. In credit, it's more complex, because it has to be tailored to the risk profile of each borrower. In terms of the entities' sources of funding, this move will make their credit about 2% cheaper compared to raising bonds or taking out bank loans."
They added, "The entities that are interested, unlike new small banks, come with a huge customer base and a proven reputation."
Published by Globes, Israel business news – en.globes.co.il – on April 1, 2025.
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