Banking Sector's Clearing System Slated for Reform

The Bank of Israel yesterday informed the directors of commercial banks in Israel of its intention to reform the banking sector's clearing system. The move comes after the International Monetary Fund pointed out several unnecessary risks that the central bank is incurring in its activity vis-a-vis the banking sector.

The IMF examined the payments mechanisms used in Israel's banking sector in 2000. A stable mechanism should include clear risk-management and liquidity criteria, with a clear distribution of the risk between the operator and the other players, the IMF explained.

This is not the situation in Israel; in most cases, the central bank assumes all the credit and liquidity risks itself.

In Israel, clearing does not take place in real time, and financial transactions are confirmed at least 24 hours after they are performed. This gap is risky because, for example, a debtor who wrote a check can meanwhile clear his account.

The new system complies with the international Real Time Gross Settlement principles and is designed to ensure secure, real-time payment and prevent most of the risks involved in the clearing process. The Bank of Israel hopes to have the system up and running by 2005, and hopes that by 2010 the system will be clearing about 90 percent of all transactions in Israel.

The reform will be implemented jointly by the Bank of Israel and the commercial banks.