Yaron: We'll replace Telbor with Bank of Israel rate

Amir Yaron Photo: Yonatan Bloom

At a Tel Aviv conference this morning, Governor of the Bank of Israel Amir Yaron also spoke of the dilemma over a possible digital shekel.

The Bank of Israel is acting to replace the Telbor interest rate with the Bank of Israel rate, Governor of the Bank of Israel Amir Yaron said at a conference held by the bank's Bank Supervision Department in Tel Aviv this morning.

Telbor interest is an interest rate for interbank loans calculated daily and published by Reuters. The rate is calculated on the basis of interest rates offered by a number of commercial banks. It is the Israeli equivalent of the Libor (London Interbank Offered Rate) short-term interest rates published daily by the British Banking Association, which serve as primary benchmark rates around the world.

In July 2017, the FCA (Financial Conduct Authority) in the UK, which supervises the Libor mechanism, announced that it intended to end publication of Libor rates at the end of 2021 because of their exposure to manipulations that have led to distortions, as these interest rates are based on subjective estimates by the banks of their financing costs and not on actual transactions. Libor will be replaced by new risk-free rates based on actual transactions, and the Bank of Israel has now determined that it will use the Bank of Israel rate.

"Telbor interest is an indicative interbank rate for various periods based on quotations from a number of banks, and is equivalent to the IBOR rates that exist in many countries. This indicative rate is a critical anchor for many contracts and financial activities in the capital market," Yaron said. "In view of the problems that have been discovered with it, many countries have switched from IBOR rates to risk-free overnight rates based on transactions in the repo market or the interbank market. In Israel, mainly because of high liquidity, there is still no repo market and almost no interbank credit activity. Therefore, there is no market interest rate that could form a basis for overnight interest rates as an alternative to Telbor. We are therefore acting to replace Telbor, on the basis of which deals in derivatives are made, with the Bank of Israel's declared rate, and at the same time to develop the repo market."

A repo (repurchase) transaction is one in which a party sells to another an asset (usually government bonds) with an agreement to buy it back on a given date at a higher price, making it in effect a loan, with the price difference being the interest. Overnight repo transactions between banks give an implied interest rate that can serve as a benchmark interbank rate.

Moving faster on digital currency

Meanwhile, the Bank of Israel has announced that it intends to accelerate the issue of a digital currency. On this, Yaron said at the conference, "At the root of the dilemma whether to issue a Bank of Israel digital currency lie several motivations: creating an efficient, advanced and secure alternative to existing and new means of payment in the digital era; creating an innovative infrastructure that will ensure that the payments system is adapted to the needs of the digital economy; building redundancy into the payments system to ensure that it will operate properly during an emergency or in the event of a breakdown; creating an efficient and cheap infrastructure for cross-border payments; preserving the facility for the public to make use of digital payments while maintaining privacy; and support for the government's policy of reducing the use of cash.

"It's important to note that the issue of a digital currency, certainly if it is not carefully designed, is also liable to involve substantial risks. The main risk is damage to the possibility of financial mediation, disintermediation. If the public chooses to convert a large part of its deposits to the digital shekel, the ability of the banks to fulfil their basic function of mediating between borrowers and savers and credit providers is liable to be harmed in a way that will cause significant damage to the economy. The digital shekel is also liable to have effects on monetary transmission. Unless the system is meticulously designed, it is also liable to give rise to cyber risks, risks to privacy, and risks to the reputation of the central bank.

"In the light of these development, the Bank of Israel has decided to accelerate its study, research and preparation with a view to the possible future issue of a digital currency, while providing a response to the various risks. It's important to stress: like many other central banks, the Bank of Israel has not yet decided whether it intends to issue a digital currency, and we are still examining the matter. We are committed to being at the forefront of financial and technological knowledge in this area," Yaron said.

Published by Globes, Israel business news - en.globes.co.il - on November 29, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

Amir Yaron Photo: Yonatan Bloom
Amir Yaron Photo: Yonatan Bloom
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