Stanley Fischer ended his term as governor of the Bank of Israel at the end of May, but his spirit continues to dominate the central bank and its top officials, who see themselves as committed to the regulatory activism that he headed. The new guidelines published by the Banking Supervision Department today, restricting mortgages, are part of this activism and of the former governor's attitude that the central bank should intervene to prevent bad consequences that the market cannot avoid by itself.
The fact that neither acting Governor Karnit Flug, nor Supervisor of Banks David Zaken, saw a need to wait for the appointment of a new governor is a sign that, as far as they are concerned, they have the authority to continue to implement Fischer's policy. To this should of course be added the delay in appointing a new governor, which has created a feeling among top Bank of Israel officials that they cannot, or should not, delay substantive decisions. The result is that the new governor of the Bank of Israel will find himself with the new directives.
As for the substance of today's directive, the Bank of Israel officials felt that they must intervene in a situation in which the weight of housing credit is rising fast, while at the same time the potential exists for deterioration in the quality of the portfolio and a rapid rise in risk. The rapid growth in the amount of mortgages and ongoing boom in housing demand presumably contributed the Bank of Israel's sense of urgency.
As far as the current Bank of Israel heads are concerned, the argument that they are responsible for the health of the financial system, and not for the ability of borrowers to obtain financing to buy a home, is still valid. As Fischer repeatedly said, the Bank of Israel is not responsible for home prices, because the solution to them lies in government policy to boost housing supply.
The persistence of Stanley Fischer's approach to the tool chosen to deal with the bourgeoning demand for mortgages should also be emphasized. The approach by another governor, possibly one of the men mentioned for the job or who withdrew from the race, would have been to use less "interventionist" tools, beginning with raising the price of money. But current doctrine at the Bank of Israel holds that it is better to use administrative means in the mortgage market, not the interest rate. An interest rate hike would further strengthen the shekel, harming exports and growth.
These are the considerations that led to today's decision, and the heads of the Bank of Israel saw no need to wait until the government appoints the next governor. The Bank of Israel is not supposed to ask for the opinion of the prime minister or finance minister on these matters, so, formally, today's step should not be a subject for argument. At the symbolic level, the present heads of the Bank of Israel sent a message to Prime Minister Benjamin Netanyahu and Minister of Finance Yair Lapid: the Bank of Israel will not wait for them, and it will do as it sees fit, when it sees fit.
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2013
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