Israel should upgrade its financial crisis management framework, says the IMF in its report, "Israel: Technical Note on Crisis Prevention and Management". It adds that many of the tools for Israel's crisis management framework are too weak or do not exist at all.
The IMF lists several flaws in Israeli crisis management: the lack of a formal mechanism for capital flows during an emergency; regulators' limited ability to intervene in troubled financial institutions; limited tools available to regulators; insufficiently defined cooperation and coordination for sharing information between regulators; and no deposit insurance. The IMF adds that Israel's regulatory framework is too micro-economically focused and lacks a stable macroeconomic approach.
"Given the structure of the Israeli economy and financial system, many financial institutions are viewed as too-big-to-fail," the IMF says. "The level of concentration in both bank and non-bank financial sectors is high. The banking system is dominated by five banking groups, accounting for 95% of bank assets. In the insurance sector, the four largest groups have a dominant market share in most business lines (e.g., their share in the life insurance market is over 80%). Moreover, Israel‘s corporate sector is dominated by large conglomerates (the turnover of the six largest groups accounts for about a quarter of GDP), with strong links across sectors. While most of the large financial institutions in Israel came out of the recent global crisis relatively unscathed, the experience of other countries provided ample evidence of the importance of having a robust framework for identifying, mitigating and managing systemic risks.
"A stronger macro-prudential framework would help identify in advance, and thus avoid or mitigate systemic financial threats. The aim of macro-prudential oversight is to prevent rather than manage crises (which is the task of crisis management framework), and to focus on the whole financial system and systemic risks, rather than on individual institutions or financial sectors and idiosyncratic risks (which are the focus of prudential supervision). In the case of Israel, the current institutional set-up is designed mainly for micro-prudential and market conduct-related objectives, rather than to ensure well-focused macro-prudential oversight and policy setting.
"The current juncture presents a good opportunity to strengthen the crisis prevention capabilities and upgrade Israel’s crisis management framework. A combination of fairly robust domestic financial conditions and a still fragile external environment provides an opportune time for taking steps towards establishing an effective framework for identifying and, where necessary, mitigating the build-up of systemic risks, as well as a framework for dealing with eventual problem financial institutions in a timely and effective manner in order to limit the impact of their distress on the financial system.
"Best practice in crisis management framework has been significantly upgraded as a result of the recent crisis experiences. The best practice‖ toolkit for dealing with financial institutions in resolution and liquidation includes the institutional arrangements and a broad set of instruments for early intervention, official liquidity, and solvency support, as well as resolution of distressed financial institutions. In the case of Israel, several elements of such crisis management toolkits are either missing or have some weaknesses.
"More specifically: there is no formal emergency liquidity assistance (ELA) framework beyond the basic ELA provisions in the Bank of Israel Law; the current provisions for early intervention powers in ailing financial institutions are limited; the range of resolution tools available to regulators is not sufficiently broad; the framework for coordination and information sharing between various supervisory authorities is not well-defined; there is no clear mechanism for funding of resolution; and there is no formal deposit guarantee scheme, but instead the Bank of Israel has the power (but not an obligation) to provide depositor and creditor protection in specific circumstances."
The IMF states, "Bringing the financial crisis management framework in Israel in line with current best practice should result in a more appropriate sharing of costs associated with financial stress among the public, the financial sector, and creditors. Thus, better incentives would be provided for managing risk by financial institutions, while protecting the less financially sophisticated participants (depositors), and would ultimately reduce the public contingent liability for resolution of financial institutions or financial crises."
The IMF concludes, "The current legal framework appears to imply that the Bank of Israel does systemic risk monitoring, assessment, and warning, and is expected to provide macro-prudential policy advice to the government and the Knesset. Other regulators/supervisors lack substantial powers for macro-prudential oversight. The legal framework is not clear about how existing functions of relevant agencies could be utilized for macro- prudential purposes. Coordination mechanisms are informally laid down in a memorandum of understanding."
The IMF recommends the establishment of a formal standing national Financial Stability Committee charged with macro-prudential oversight. The committee should be chaired by the Bank of Israel, and also comprise all the relevant agencies, including the Ministry of Finance.
Published by Globes [online], Israel business news - www.globes-online.com - on November 15, 2012
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