Governor of the Bank of Israel Prof. Stanley Fischer today unveiled his plan to increase the liquidity of the financial system in order to prevent a possible credit crunch.
Although Fischer's plan resembles plans already launched in other countries, including the US, it is significantly narrower in scope. The Bank of Israel's plan applies tools relevant to its function as the bank of banks, a critical function of central banks worldwide.
From January 2009, the Bank of Israel will reduce the absorption of surplus liquidity that it carries out via the issue of short-term bills issued by the Bank.
The public's purchases of short-term bills results in money deposited at the Bank of Israel thereby taking it out of circulation. Reducing the supply of short-term bills increases the money supply by negating this effect.
In addition to the one-day and one-week monetary loans and deposits currently offered through auctions to the banking system, the Bank of Israel will offer longer term loans and deposits. The interest spread between the credit window and the deposit window for commercial banks will be reduced from plus/minus one percentage point around the Bank of Israel interest rate to plus/minus half a percentage point.
Repo auctions for commercial banks and institutions will be offered for longer than the current period of one week.
The Bank of Israel said that it expects these measures to increase the liquidity available to financial institutions, businesses and households, and to reduce its cost. It will monitor the effects of these steps, and will examine other instruments as necessary.
Published by Globes [online], Israel business news - www.globes-online.com - on December 24, 2008
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