Comptroller finds BoI management of currency reserves flawed

Among other things, the central bank is criticized for out of date procedures and possible conflicts of interests on the part of employees.

In its report released today, the State Comptroller's Office finds many deficiencies in the policies for managing the Bank of Israel's foreign currency reserves. In March 2008, the bank began a process of expanding the foreign currency reserves, which rose from $28 billion to $75 billion, thanks to a purchasing program that changed its aims and methods several times.

The report states that "deficiencies were found in supervision and control of the Market Operations Division over the work of the bank's dealing room." It was found that the division had not updated some of its procedures for several years, although its working methods had changed. In addition, "treatment of the problem of possible conflict of onterests on the part of the bank's employees has not yet been completed," and the Comptroller urges that it should be completed immediately. In this context it was pointed out that there is no control on the process of receiving bids, so that there is an operational risk that an employee will not receive more than one bid, or will not choose the best bid.

Management of the bank's reserves is conducted in comparison with a benchmark portfolio, known as the numeraire, a hypothetical currency made up of the currencies of Israel's trading partners. The report criticizes the lack of transparency in setting the makeup of the numeraire, and also mentions that the audit failed to find tools with which the division could measure the overall risk of the reserves portfolio in extreme conditions.

It was also found that the foreign currency committee and the narrow monetary committee, two committee's chaired by Governor of the Bank of Israel that set policy for managing the reserves, have been acting without written procedures regulating their activity and the relationship between them.

According to the new Bank of Israel Law, any change in the principles of policy for managing the reserves requires consultation with the minister of finance, but the comptroller finds that the bank has not yet defined what such a change is. Furthermore, "at the offices of the governor and of the minister of finance there is no documentation of the content of working meetings and liaison between them that, among other things, dealt with the foreign currency reserves.

The Bank of Israel stated in response, " The Governor and management of the Bank of Israel are proud of the way the foreign exchange reserves have been managed in recent years. In terms of results, the bank's activity in this area has proven itself, to the benefit of Israel, its economy and its citizens, by supporting growth, employment, and exportswhich maintained the competitiveness of Israel's economy and contributed markedly to the success of the economy in dealing with the global financial crisis.

"The State Comptroller's report notes certain aspects that require improvement. Some of those issues were corrected during the audit process. The others are being dealt with as part of the implementation of the new Bank of Israel Law."

Published by Globes [online], Israel business news - www.globes-online.com - on October 17, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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