Government Plans Steps to Close Gaps in Capital Market Supervision

Bank of Israel Governor Karnit Flug cites lessons from 2008 global financial crisis.

Citing the failure of regulators in the run-up to the global financial crisis to supervise new financial tools, Israel is seeking to plug holes in its capital markets supervision, Bank of Israel Governor Karnit Flug told TheMarker Financial Conference on Tuesday.

She said the government was moving forward with plans that would draw members from the Bank of Israel banks supervisor, the treasury’s capital markets unit and the Israel Securities Authority among others to identify potential areas of risk in the country’s capital markets.

“One of the important lessons that arose from the world crisis was that despite the fact that most [financial] institutions are subject to regulation, there were areas that expanded rapidly where regulation was lighter,” she said, recounting how global markets seized up in the final days of 2008.

“The interface between different institutions brought a rapid transfer of risk to sectors of the financial market that had been ignored by regulators,” Flug said.

She cited the non-bank credit market as an example of a sector that expanded too quickly for regulators be able to monitor. Flug noted that some 100 companies with combined debt of 40 billion shekels ($11.5 billion) were undergoing restructuring.

“This shows that in corporate bonds, regulation developed gradually and this became a major problem,” she said.

Dorit Salinger, the treasury’s commission of capital markets, insurance and savings, identified one of the financial market’s problems in the absence of competition in the pension sector, where only five major players operate.

“It doesn’t allow savers to choose between different plans or management fees,” she said in an interview at TheMarker Financial Conference. “The institutions have turned into central players in the credit market so that the concentration, in fact, encompasses the credit market as well, which affects the entire economy.”

She said she was working to entice more competitors into the segment. However, Salinger discounted concerns that have been expressed by the Bank of Israel that institutional investors suffer from a herd mentality, putting their portfolios in the same kinds of investments.

“The flood of money to institutions into domestic investments has created a situation in which there aren’t a lot of options,” she said. “It’s hard to create a lot of variability in the Israeli markets, which is small. The differences can only be manifested in investments they make abroad.”

As for ensuring adequate pension savings as Israelis live longer and interest rates are low, Salinger said raising the pension age isn’t the only solution. The government is looking into different ways of making pension payouts.

“We don’t have a problem with pensions yet but we have to be prepared for such an eventuality,” she said. She cited the problem of people cashing in their pensions when they change their place of work, a decision she said that can cost as much as 40% of savings.

Reuters