Supervisor of Banks Dr. Hedva Ber touched perhaps the most sensitive nerve in Israel's banking industry today: efficiency. Ber has published guidelines calling on the banks to submit multi-year streamlining plans, and will relax capital adequacy requirements for the banks that present the most aggressive streamlining goals.
"The guidelines," the Bank of Israel hopes, "will encourage the banks to carry out significant streamlining processes by defining regulatory relaxations, against the background of the low level of efficiency that characterizes most of the banks in the Israeli banking system in comparison with the rest of the world."
Some Israeli banks have become more efficient in the most few years (Bank Hapoalim (TASE: POLI), Bank Leumi (TASE: LUMI), and Mizrahi Tefahot Bank (TASE:MZTF) being the outstanding ones), but the banks' operating efficiency is still low by global comparison. According to the Bank of Israel, the operating efficiency ratio (operating expenses as a proportion of operating revenue) at the banks in Israel averaged 70.2% in the period 2012-2014, compared with 60.2% in Western Europe and 60% in the OECD. According to the Bank of Israel's figures, only Mizrahi Tefahot Bank is more efficient than the banks in Europe and the OECD, with an operating efficiency ratio of 59.5% in the period. Among the five large banks, Israel Discount Bank (TASE: DSCT) is the least efficient, with an operating efficiency ratio of nearly 80%.
“The goal is for the banks to carry out significant processes to increase efficiency. The steps to increase efficiency will enable the banks to lower the costs of banking services, particularly for households and small businesses. The increased efficiency, alongside a range of steps taken to increase competition, will ensure a more stable and competitive banking system, for the benefit of customers,” Ber said, adding, “We are aware of the difficulties inherent in increasing efficiency in the system and therefore defined new guidelines that will make it easier to carry out voluntary retirement and cost reduction programs, which will lead to the required significant increase in efficiency.”
The Bank of Israel seeks to prod the banks to become more efficient in the light of the Strum committee recommendations, which are expected to boost competition in the financial system, and generally because in the Western world the operating efficiency ratio of banks is on a downward trend, while in Israel the process of becoming more efficient is relatively slow because of the power of the workers committees. The Bank of Israel is now taking on the role of the responsible adult, entreating the banks to streamline, while sending a clear message to the workers committees.
Where will greater efficiency come from? "These processes can be carried out through setting a voluntary retirement program for employees, and other cost reductions," the Bank of Israel suggests. The central bank is also offering an incentive in the form of more lenient capital adequacy requirements for banks that present the most aggressive efficiency goals, to compensate for the expense involved in voluntary retirement programs.
The Bank of Israel's draft guideline calls on the banks to formulate and present multi-year plans that will include intermediate goals and monitoring and supervision of implementation of the plan by the banks' boards of directors. The banks will be required to report routinely to the Bank of Israel on the matter, and, as mentioned, "the Banking Supervision Department will take steps to support the plans to increase efficiency, including leniencies in capital adequacy requirements for banks that will define significant long-term plans to increase efficiency, and clarifications regarding the accounting treatment of said plans."
The Bank of Israel stresses technological advance as a lever for efficiency. "The environment of economic, regulatory, and technological activity in which the banking system operates in Israel, as worldwide, is undergoing many changes that are expected to continue in the coming years. The technological changes in the financial sector are changing the 'production function' of banking services, as customers worldwide and in Israel are moving to increasingly consume banking services directly-via the Internet, mobile, and automated banking devices," the central banks says.
"In addition, the availability of the technology considerably increases, and will increase, the transparency of the information to customers, the ease of receiving competitive offers from a number of entities, and thus the competitiveness in the banking system as well competition from nonbank entities.
"In view of these trends, and the fact that various banking system performance indices show a markedly low level of efficiency for banks in Israel, compared with the rest of the world, the Banking Supervision Department intends to emphasize processes to increase efficiency in the coming years," the Bank of Israel says in its statement.
Published by Globes [online], Israel business news - www.globes-online.com - on December 28, 2015
© Copyright of Globes Publisher Itonut (1983) Ltd. 2015