The Finance Ministry and the Bank of Israel are conducting intensive talks on a reform program for the capital market. Governor David Klein outlined the reforms he would like to see enacted in an interview with Haaretz.
Klein's reform proposal aims to address the excessively centralized role of the banks in the capital and financial markets. He suggests turning the insurance companies into a competitive alternative to the banks in the capital market by allowing insurance firms to purchase pension funds and, more importantly, separating the providence funds from the banks and selling them to the insurance companies.
"The financial markets in Israel are built in an unbalanced way," Klein explains. "They lean very heavily on the banks as middlemen. This needs to be corrected. We need to create a market outside of the banks. In the United States, the non-bank market is investment banks. We have only weak alternatives to investment banks. The more I look, the only anchor I find that is capable of serving as an alternative to the banks are the insurance companies. There is no other orderly and stable body that can take this competition upon itself."
In this scenario, the insurance companies would take over management of all types of pension savings (providence, pension and insurance). The scope of assets managed by the insurance companies would still be smaller than that of the banks, but they would be big enough to create stable competition vis-a-vis the banks.
Klein calls for a complete separation of the banks and insurance companies in order to make the latter a competitive alternative. Thus, according to the governor, the banks should sell all of their insurance company holdings and the insurance companies should be prohibited from acquiring banks. (Currently, all of the major banks have 20 percent stakes in the large insurance companies.) After the separation of the banks and insurance companies is completed, the banks would be allowed to begin to sell insurance policies.
The governor says he would also like to take mutual funds out of the purview of the banks, but - unlike the providence funds - would oppose selling the mutual funds to the insurance companies. Instead, he suggests selling the mutual funds to brokers.
"Mutual funds are the main focus of the investment banks that are lacking in Israel. If this type of world cannot be built today, I would at least leave the funds available on the side so that brokerage firms could buy them and start to build up investment banking in Israel," Klein explains.
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