Israel Preparing Contingency Plans for Potential Implosion of Financial Systems, Says BoI Governor

There is general agreement that Israel weathered the global storm in pretty good condition. Fischer, however, said that phrases such as 'island of stability' and 'this time we've learned how to manage the business cycle' worry him.

Israel's economic leaders are learning lessons from abroad. Following the implosion of banking systems in the United States and Ireland, for instance, the leaders made contingency plans for similar scenarios in Israel. It isn't that such scenarios are expected, rather that they could theoretically happen.

"If a financial institution, a bank or some other institution goes bankrupt, we can't let it fall like Lehman Bros. did. But we certainly can take the shares from its owner for nothing, and close it down, or sell it with caution," Bank of Israel Governor Stanley Fischer said yesterday at the annual conference of the Association of Banks in Israel.

Moti Kimche

The Bank of Israel is considering what to do about the bondholders of any bank in such a condition, Fischer said.

"We have passed the worst, but we live in a complicated world," he said. "Different countries are recovering from the crisis at different speeds." Some have restored brisk economic growth and some haven't, he added.

There is general agreement that Israel weathered the global storm in pretty good condition. Fischer, however, said that phrases such as "island of stability" and "this time we've learned how to manage the business cycle" worry him.

"It's a demonstration of complacency," the governor said. "We must not fall into complacency. We should keep in mind that the biggest crises start in the real estate sector. Ireland's economic policy was excellent, but they didn't take enough care that the banks wouldn't take adventures around the world and grow beyond reasonable size." The same happened in Iceland, Fischer added.

The Bank of Israel's mandate isn't just to ensure the stability of the banks; it's to protect the economy as a whole, the governor said.

Hence the attention paid to the real estate market, where housing prices have been rising sharply for years. The central bank's steps boil down to addressing the demand side by raising the interest rate on large mortgages.

But the real solution to the upward spiral of housing prices, which is spurring inflation, lies in the supply side, Fischer said: "There are signs that the market has begun to stabilize, but I'm not sure it's true, as the figures at the Finance Ministry and the Central Bureau of Statistics are different. If we can't stabilize the real estate market through the government's steps, we will take additional macroprudential steps."

Also at the conference, Finance Minister Yuval Steinitz said Israel is working to showcase its financial innovations to central banks around the world, "just like Google and Intel have centers here," he said. "We have an advantage in innovative financial technologies too."