Treasury Team to Study Dysfunction in Local Capital Markets, as Stock Exchange Volumes Slump

May even rethink existence of Tel Aviv exchange in its current form.

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Does Israel even need a stock exchange? That is a good question. A Finance Ministry team is studying the decline of capital market activity in Israel and its implications for economic growth.

In principle, the team will even be looking at whether there is justification for an independent stock exchange here at all, in light of the argument that the Tel Aviv exchange suffers from the inherent problem of small-market size.

Among possible options that the team may consider is affiliating the Tel Aviv Stock Exchange with a larger stock market abroad.

Last year the average daily stock trading volume on TASE declined to NIS 1.1 billion, which was just 55% of the average trading volume in the course of a day’s trading in 2010. New corporate funding through bond issues has also been on the decline.

The team, which is to be headed by Finance Ministry director general Doron Cohen, will survey deficiencies in the way the capital markets are structured here, and what requires the attention of the new government that will be formed following last month’s election.

During the past year, only 58 companies raised new share capital on TASE and none of those companies was new to the exchange. The total amount raised was about NIS 3.1 billion, a quarter of what was raised in 2010.

Over the course of the past year, 44 companies stopped trading their shares on the exchange. And now just 552 are listed on the exchange, the lowest number in more than a decade.

The corporate bond market on TASE does continue to function relatively well, but it too has been slowing. Not including the Israel Electric Corporation, which is a state-owned utility, a total of NIS 28 billion was raised in 2012 on the corporate bond market here, compared to NIS 42 billion in 2010.

The numbers reflect real problems in the way capital markets are functioning here, and are an indication that, under the current system, the markets are not serving as an intermediary between the small individual investor and companies in need of capital. As a result, the role of the capital market as an engine of growth has arguably been impaired.

At this stage, the Finance Ministry team is not proposing specific solutions. Instead, it will be surveying the state of the market and identifying the problems, and looking at a range of possible solutions that should be considered in detail once a new government is set up.

The team will also look at the current relationship between the two groups of financial entities that serve as intermediaries in the capital markets − the banks and the institutional investment firms.

Institutional investors play the largest role as go-betweens with potential investors, currently managing assets of a trillion shekels. Within a decade, that figure is expected to grow to NIS 2 trillion. But the institutional investment firms do not provide capital to individual households or to small businesses, and therefore do not contribute to economic growth from these two sectors.

Attempts to get the institutional investors involved in new investment sectors − for example, through funds that specialize in real estate, rental housing or biotechnology − failed for technical reasons. Staff at the Finance Ministry are now seeking to find ways to overcome these hurdles.

For their part, the banks have a lot less money, but they have the professional know-how and the access to members of the public to perhaps spur new investment in areas of potential growth in the economy.

One thought at the Finance Ministry is that steps should be taken to encourage cooperation and the transfer of capital from the institutional firms to the banks.

Even now, it should be noted, steps have been taken to make such a transfer possible. The institutional investment firms can invest up to 7.5% of their capital in a single bank, in shares and deposits, as opposed to 5% in other types of companies.

The interior of the Tel Aviv stock exchange. Credit: Reuters

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