Overview: FAQs- Banking and Finance in Israel

FAQs- Banking and Finance in Israel

What is the Israel Banking System?

Israel's financial system is sophisticated. It consists of 16 banks, four international banks with Israeli licenses, and three big and three small card firms.

Bank Leumi, Bank Hapoalim, Israel Discount Bank, Bank Mizrahi-Tefahot, and First International Bank are the main Israeli banks (FIBI). The Tel Aviv Stock Exchange is where these banks' shares are traded. The combined market share of Bank Leumi and Bank Hapoalim is roughly 60%, indicating that the Israeli financial sector is relatively centralized.

International banks that have acquired banking licenses to work in Israel include Barclays Bank, Citibank, HSBC Bank, and State Bank of India. Under different regulatory agreements, Bank of America, Deutsche Bank, UBS, BNP Paribas, and other international banks maintain a presence in Israel.

Central bank of Israel

The Bank of Israel is the government's central bank, in charge of issuing money, establishing and enforcing Israel's monetary policy, and monitoring and supervising bank operations through the Bank of Israel's Banking Supervision Department.

The Supervision Department is working to accomplish a range of public and economic goals, including preserving and sustaining bank stability, protecting banking consumers, and fostering competitiveness, among others. In order to achieve these goals, the Supervision Department has been working on two secondary goals in recent years: technical advancement in banks and improving the performance of the banking system.

How is the Banking Market of Israel?

In recent years, Israel's financial system has undergone significant changes. Following various supervisory criteria, it has increased its flexibility, reduced its vulnerability to high financial risks, and made substantial improvements to its business-operational models (which have been adjusted to be more competitive and technology-oriented). The banks have learnt and incorporated lessons from previous incidents by significantly lowering exposure to major creditors while diversifying the banking credit base and reducing regulatory exposure related to non-resident customers.

These interventions were reflected in the banks' financial performance as well as an increase in capital market sentiment, as shown by the continued upward rise in bank share prices above the general stock index. Controlling owners have increasingly sold stock of banks to the general public in recent years, and the public now owns the bulk of shares in Israeli banks, with no single controlling shareholder in the three main banks, Leumi, Hapoalim, and Discount. As a result, the general public benefits from increased bank dividends as well as higher stock prices. Keeping ownership of an Israeli bank necessitates a control permit from the Bank of Israel, which must be issued after a thinking process that includes an extensive review of the applicant's financial health, as well as proper inspections. A holding permit is also necessary if you own more than 5% of a bank's stock.

What are the recent developments in the Israeli Banking System?

The Non-bank Credit Market

Non-bank lenders' lending volume has risen significantly in recent years, and numerous private and public firms, as well as hedge banks, mutual funds, and insurance companies, have begun to provide credit to both retail and corporate customers.

A new legislation, the Supervision of Financial Services Law (Regulated Financial Services), 5776-2016, was adopted in 2016 to govern this growing phenomenon (the "Financial Services Law"). The Financial Services Law is part of a major regulatory overhaul aimed at improving non-institutional entity oversight of financial services, developing and growing innovation in the financial services market, securing investor interests, and maintaining compliance with the anti-money laundering regime. Extending credit (including check discounting, offering credit lines, and asset-backed lending) includes a credit license under the Financial Services Law (the "Licence to Provide Credit"). When services are given in Israel, as well as when clients are aggressively solicited in Israel in conjunction with services provided from abroad, the licensing obligation is activated.

Certain exemptions to the licensing provision were established by regulations passed under the Financial Services Law.  The main exemptions apply to foreign corporations who meet the following criteria: (i) they are incorporated in an OECD member country; (ii) they hold a banking license from a regulatory authority in such a country; (iii) they are subject to an anti-money laundering regime in such a country; and (iv) they are not required to obtain a license under the Banking Law (Licensing), 5741-1981. Another significant exception is for lenders who lend exclusively to business creditors for sums greater than ILS3 million. The Exemption Regulations remain in effect until June 16, 2020, and are likely to be extended after that.

Brokerage Activities in Israel

Section 49A of the Israeli Securities Law went into force in 2019, making it illegal to provide financial facilities in Israel for securities listed on exchanges and trading systems (other than the Tel Aviv Stock Exchange) unless the Israeli Securities Authority grants a permit ("ISA").

In view of Section 49A, international companies seeking to offer brokerage services to Israeli customers have basically two options:

1. To only offer services to "Qualified Investors" as customers. According to the Israeli Securities Law, qualified investors include institutional investors, major corporations, and high-net-worth individuals. This option does not necessitate submitting an application to the ISA.
2. Entities covered by some jurisdictions are eligible to apply to the ISA for a permit to represent Israeli customers, including non-Qualified Investors. This route is currently available to non-Israeli entities that are subject to regulation (a) in the USA as a 'broker-dealer;' (b) in an EU country under MiFID II as a 'investment firm' or 'credit institution' or (c) Swiss-licensed banks approved as 'security dealers' under applicable Swiss law, provided that, pursuant to the applicable regulation to which that entity is subject, the fact that they are authorized as 'security dealers'. Entities accredited in other jurisdictions (i.e. not in the USA or the EU) may also apply for a special permit from the ISA. In the application, they must define the regulatory regime applicable to them, the regulation of their brokerage activities and their obligations under foreign law vis-à-vis clients located in Israel.

The ISDA Agreement

Over-the-counter derivative transactions have also become popular in recent years, and many Israeli banks and institutional investors, as well as companies that need to hedge currency and commodity exposure, are entering into derivative transactions under the ISDA Master Agreement with foreign counterparties.

The Digital Bank

On 2019, the Bank of Israel decided to issue a license to a new bank, which had not been given a new banking license for several years. The new bank plans to act as a digital bank, i.e. without branches or physical establishments.