Prepare for negative rates, Treasury tells institutions

Dorit Salinger
Dorit Salinger

The Ministry of Finance is asking financial insitutions how they will cope if the negative interest rate happens.

The Ministry of Finance has instructed Israeli financial institutions to prepare for the introduction of a negative interest rate in Israel and to provide it with detailed explanations of the strategies they will adopt in respect of the deposits and cash they hold.

The instruction came in a short letter from Commissioner of the Capital Market, Insurance and Savings Dorit Salinger to the institutions, in which she explains that interest rates around the world are low and are liable to become negative. The institutions have many assets in the form of deposits and cash, and they are therefore required to hold discussions in their investment committees and to send the commissioner the minutes of the meetings and the strategy they will adopt for their shekel and foreign currency balances in Israel and elsewhere in the event that interest rates in Israel become negative. The Ministry of Finance requires a response to the circular by May 6.

The implication of the Ministry of Finance's instruction is that although Governor of the Bank of Israel Karnit Flug, dubbed the world's most surprising central bank governor by Bloomberg, has in fact unsurprisingly left the interest rate unchanged for three successive months, contrary to forecasts by foreign banks, the Ministry of Finance nevertheless seeks to prepare the ground for a situation in which the Bank of Israel's interest rate does fall, and is readying the institutions for such a scenario.

"Against a background of low interest rates in Israel and around the world, and given the fact that some central banks have even lowered their interest rates below zero, a situation has arisen in which the cost of money held in bank deposits becomes negative. The large amount of money currently held by financial institutions in deposits makes it obligatory to prepare for the possibility that they will have to cope with a complex situation of negative interest rates overseas and in Israel, and to examine alternative investment instruments," the letter states.

A source in one of the financial institutions explains that investment institutions need cash in order to make payments, to exploit opportunities, and so on. They therefore need to have money readily available. "I presume that all the institutions have already given some thought to how to operate in the current interest rate environment, and that they continue to consider the matter. I think that investment committees will now decide that they will not hold money at negative interest rates, and that they will raise risk and reduce liquidity. But this is a much bigger problem than a letter."

Published by Globes [online], Israel business news - www.globes-online.com - on April 28, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Dorit Salinger
Dorit Salinger
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018