New BoI leadership will face economic and political storms

The Bank of Israel  credit: Tali Bogdanovsky
The Bank of Israel credit: Tali Bogdanovsky

A further term for Governor of the Bank of Israel Amir Yaron is in doubt, while the supervisor of banks position is becoming vacant.

Five years have passed since then minister of finance Moshe Kahlon informed Governor of the Bank of Israel Karnit Flug in March 2018 that he did not intend to offer her a further term in the post. Kahlon’s decision came after Flug submitted a report to him critical of his policies and warning of their consequences.

Today, we are in a similar situation. Months before his term is due to end, current Governor of the Bank of Israel Amir Yaron has been warning of the economic consequences of the judicial overhaul being advanced by the government, and against any move that might harm the Bank of Israel’s independence.

Interviewed by "Globes" last month, just after announcing an eighth successive interest hike, Yaron was asked about political moves that might detract from the independence of the Bank of Israel. He responded that the bank’s independence was of the utmost importance to the economy, and that international institutions said so explicitly. "We know what history shows concerning those countries in which the independence of the central bank has been harmed, that it was ruinous for the economy. I believe that all the decision makers understand that."

In July 2018, Flug wrote in a similar vein to the prime minister, then as now Benjamin Netanyahu, when she informed him that she would in any case not submit her candidature for a further term as governor of the central bank, even if Netanyahu - who did not want her in the job in the first place but who nevertheless appointed her five years earlier - requested it. The independence of the Bank of Israel was mentioned several times in the letter, and the word "professionalism" appeared no less than nine times. "Political" appeared just once.

The same Netanyahu now has to decide whether to extend Yaron’s term. The law allows the governor’s term to be extended by a further five years, and the matter is subject to a decision by the government. Flug’s two predecessors, Jacob Frenkel and Stanley Fischer, were both given a second term, but neither completed it. "Should the governor be offered a further term? In my opinion, yes," a senior banker told "Globes", and added, "Will he want it? There’s a big question mark over that."

"Globes’" enquiries have revealed that in Netanyahu’s circle there have been consultations over the matter in the past few weeks, as part of a more comprehensive discussion concerning senior officials whose terms end this year, but no decision has yet been made on whether to extend Yaron’s term. Among the positions that need to be filled are Supervisor of Banks at the Bank of Israel, after the current incumbent Yair Avidan made a surprise announcement that he would step down early; chairperson of the Israel Securities Authority, with Anat Guetta due to finish her term shortly; and Commissioner of Capital Markets, Insurance and Savings - Amit Gal is currently acting commissioner after Moshe Bareket quit a year before the end of his term.

In political circles, Netanyahu’s economic adviser Avi Simhon has been mentioned as a possible candidate for Bank of Israel governor, but his chances of being chosen do not appear to be high. Recent history shows that an acting governor can be appointed who becomes permanent, such as happened with Flug, or who turns out to be temporary, as happened in the case of Nadine Baudot Trajtenberg, who nevertheless managed to raise the interest rate at the end of 2018 for the first time in three and a half years.

The current Deputy Governor of the Bank of Israel is Andrew Abir, a Bank of Israel veteran who perhaps knows that institution better than anyone and who has the most influence among the bank’s senior managers. If no replacement is found for Yaron before the time comes for him to step down, Abir will become the natural candidate to take on the job, at least temporarily.

High potential for clash with the politicians

The new governor, if there is one, will face many challenges, and will assume the post in a stormy period in the global economy that of course affects Israel as well. Even setting aside the judicial overhaul, one of the challenges for every governor is to defend the professional independence of the central bank.

There are periods when that is fairly easy, such as the long period in which inflation and interest rates were low. But a period in which the world is heading towards an economic slowdown and inflation is high invites attempts by politicians to interfere. Bills have been proposed recently to exclude mortgages from interest rate rises, or even to remove the authority of the governor of the central bank to manage interest rate policy. Let us also not forget that the governor of the Bank of Israel serves as economic adviser to the government, a role that brings with it high potential for clashes with politicians.

On the professional front, the new governor will have to navigate the Bank of Israel’s policy in a period of slowdown and even recession, inflation, relatively high interest rates, possible depreciation of the shekel, and home prices that have soared in recent years, to name just a few of the challenges that the Israeli economy presents.

Avidan’s early retirement means that it will be Yaron who appoints his successor, who will serve under the new governor. In the past, the governor has chosen the person who would work most closely with him, cooperation with whom is decisive in promoting Bank of Israel policy towards supervised entities. The new governor will have to understand that the entire banking and financial system is undergoing many developments, from the open banking reform to the entry of new players, and will require in-depth knowledge of the system, not just at the macro-economic level.

In-house challenges also await the new governor. Yaron benefitted from the fact that he took up the post after pay agreements at the Bank of Israel had just been signed. Now, this issue arises again. It takes considerable managerial experience and talent to run such a large organization. The governor will also have to understand the media in order to be able, together with his or her team, to explain the bank’s policies to the public and to the politicians, and to respond in a businesslike manner while sustaining criticism and insults.

The new supervisor of banks will have their own challenges. He or she too will have to deal with activist politicians, who have already raised proposals such as mandatory interest on current accounts, which currently total some NIS 500 billion but do not bear interest. The supervisor is also liable to lose regulation of the credit card companies, with moves afoot to transfer it to the Israel Securities Authority, while at least two of these companies are being acquired by insurance companies. Which brings us to a no less important challenge: cooperation with the other regulators, who want more and more authority, while every few months there are calls to change the structure of financial regulation.

Finally, the supervisor will have to maneuver between maintaining the stability of the banks and the welfare of bank customers, at a time when the banks are posting record profits. The aim of every banking regulator is that no bank should collapse on his watch. Since the collapse of Trade Bank in 2002, that has not happened. For the sake of the incoming supervisor and of the Israeli public, it must not happen again.

Published by Globes, Israel business news - - on March 7, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

The Bank of Israel  credit: Tali Bogdanovsky
The Bank of Israel credit: Tali Bogdanovsky
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