Discussions Under Way to Set Up Financial Stability Board for the Country

Entity would identify risks and provide policy oversight in the event of a real crisis.

The Bank of Israel and the Finance Ministry, along with the Israel Securities Authority, are working on the creation of a financial stability entity for Israel that would prepare for and address any eventual financial crisis here. The entity would be similar in function to the Financial Stability Board that the group of the 20 largest economies, the G20, set up in 2009.

Several meetings have been held on the establishment of an Israeli financial stability board. Those in attendance have included representatives of the Israel Securities Authority, the capital market division of the Finance Ministry, and the supervisor of banks at the Bank of Israel. The governor of the Bank of Israel, Stanley Fischer, has expressed a desire that the entity be established within the central bank, although there are others who have said it should be independent. In any event, it is not expected to infringe on the current authority of agencies now engaged in the regulation of financial activity. There could, however, be disagreement over the final composition of such an entity and who would sit at its helm.

Currently, there is an unofficial committee, the so-called "Forum of Three," headed by Fischer and Finance Ministry Director General Doron Cohen. Deliberations are coordinated by Michael Kahn of the central bank. In practice, the current intention is to turn this unofficial panel into an official entity authorized by specific legislation.

Documentation on the necessary legislation to establish the body is expected to be provided to Prime Minister Benjamin Netanyahu for his approval, and he is expected to decide how the new entity will fit into the existing structure of government. All three of the government agencies involved - the central bank, the Finance Ministry and the Israel Securities Authority - are expected to have representation on any such Israeli financial stability board.

A major factor in current efforts to set up such an entity here, was the recommendation of the International Monetary Fund, in a special report last year dealing with Israeli financial institutions, that such a body be established. The role of the representatives to the new entity is expected to be critical, not only in the event of a financial crisis but also in the case of a military or political crisis requiring the Bank of Israel to inject funds into the economy and necessitating the intervention of the Finance Ministry in the capital markets and elsewhere.

Financial stability oversight agencies have been set up in various developed countries around the world in recent years based on a number of different models. The trend has been gaining traction, particularly since the global financial crisis of 2008, on the understanding that properly management of such a situation requires thorough and organized planning. The American treasury secretary heads a similar body of 14 regulators. The European Union set up the European Financial Stability Facility in May 2010, which has been dealing ever since with the European debt crisis. The goal of a comparable Israel "super agency" would be to reduce the risks posed by a financial crisis.

Fischer is thought to want the deliberations of an official stability board to be formal and systematic, while Cohen, the Finance Ministry director general, is understood to want a more practical approach to crisis management. In any event, the entity would be expected to identify overseas risk factors and their potential implications on Israel, including the macroeconomic situation, the capital markets and the banking system here.

This could include the collapse of a major bank, or dire financial straits encountered by a tycoon who owns a major chunk of the business sector. As a first step, the entity is expected to amass a database of risks to the local economy.