Regulator warns: Israel cannot afford a bank collapse

Banks Supervisor Rony Hizkiyahu says we haven't seen the worst of the current crisis.

"Intervention in the markets is absolutely imperative," he said on Monday at the New Financial Order conference sponsored by TheMarker. "Israel simply can't afford a bank failure."

In an economy as small as Israel's, this could create a domino effect, he said.

"Our goal is to protect all of the banks in the banking system, which are an integral part of the overall financial system," said Hizkiyahu.

Many countries, foremost the United States, have taken extraordinary steps to deal with the crisis, Hizkiyahu said. Economies that had been considered stable found themselves floundering, and have been forced to take unusual steps. The problem will be with countries whose large institutions have debts larger than what the state can provide.

"The crisis requires unusual steps, and we need not stick to the old rules. States have become the saviors and owners of institutions, and in fact, without the world's central banks there would be no economy today, because of a crisis of trust among the public and financial institutions," he said.

Hizkiyahu warned that the real crisis will be long and difficult. Some financial institutions cannot be saved even by their own central banks, he said. He pointed to Iceland, the first OECD member state to ask for International Monetary Fund assistance - and possibly not the last, he noted.

Institutional investors have failed

"We believe most companies will meet their debts. There is too large a gap between those who fly private planes, and those who are worried about their pension savings," Psagot chief executive Roy Vermos said at the conference on Monday. "This has been an opportunity to stand before a crowd and promise that everything will be done to repay debts."

"The rules of the game in Israel were such that even if there were no guarantees on bonds, we as institutional investors have failed," he said. "We should have demanded more guarantees and higher risk premiums, but our responsibility now is to change the rules of the game. In the future, if the guarantees are not fully coordinated, we won't allow these people or companies to raise money on the capital market again."