Israeli Banking System

Israel has a sophisticated banking system. It consists of 16 banks, 4 foreign banks licensed in Israel, as well as 3 large and 3 smaller card companies.

The largest Israeli banks are Bank Leumi, Bank Hapoalim, Israel Discount Bank, Bank Mizrahi-Tefahot and First International Bank (FIBI). The shares of these banks are listed for trade on the Tel Aviv Stock Exchange. The aggregate market share of Bank Leumi and Bank Hapoalim is approximately 60%, which means that the centralization of the Israeli banking system is relatively high.

Barclays Bank, Citibank, HSBC Bank and State Bank of India are foreign banks that have obtained banking licences to operate in Israel. Bank of America, Deutsche Bank, UBS, BNP Paribas as well as other foreign banks also maintain a presence in Israel under various regulatory arrangements.

The Bank of Israel – the Central Bank

The Bank of Israel is the government's central bank, responsible for the issuance of currency, setting and implementing the monetary policy of Israel and regulating and supervising the activities of the banks, through the Banking Supervision Department of the Bank of Israel (the "Supervision Department").

The Supervision Department is working to achieve a number of objectives for the benefit of the public and the economy, such as protecting and maintaining the stability of the banks, protecting banking customers and promoting competition, etc. In the framework of these objectives, the Supervision Department has been advancing two secondary objectives in recent years - technological innovation in banks and the improvement of the banking system's efficiency.

The Banking Market

The banking system in Israel has seen considerable change in recent years. It has improved its stability following numerous supervisory requirements, reduced its exposure to large financial risks and made significant changes in its business-operational models (which have been adjusted to be more competitive and technology-oriented). The banks have learned and applied lessons from past events by greatly reducing exposure to large borrowers while increasing the diversification of the banking credit portfolio, as well as reducing regulatory exposure in connection with non-resident customers. These measures were reflected in the banks' financial results and the boost in confidence in the capital market, as seen in the continuing upward trend of bank share prices beyond the general stock index. In recent years, shares in the banks have gradually been sold by controlling shareholders to the general public and, today, the public holds the majority of shares in Israeli banks, where the 3 largest banks, Leumi, Hapoalim and Discount, have no sole controlling shareholder. As such, the public is benefiting from increased dividends being distributed by the banks and from higher share value. The holding of control in an Israeli bank requires a control permit to be obtained by the Bank of Israel, following a thought process involving extensive examination of the financial stability of the applicant, and t and proper examinations. A holding permit is also required for 5% ownership of shares in a bank.

Recent Developments in the Israeli Banking System

The Non-bank Credit Market

In recent years, the volume of credit extended by non-bank lenders has been dramatically increased, and many private and public companies, as well as investments funds, pension funds and insurance companies, have started to offer credit both to retail clients and to the business sector.

To regulate this increasing phenomena, a new law was enacted in 2016 – the Supervision of Financial Services Law (Regulated Financial Services), 5776-2016 (the "Financial Services Law"). The Financial Services Law is part of a major legislative reform intended to improve the regulation of financial services by non-institutional entities, developing and increasing the competition in the financial services industry, while protecting the rights of consumers and ensuring compliance with the anti-money laundering regime.

Under the Financial Services Law, engaging in extending credit (including check discounting, providing credit lines and asset-backed lending) requires a licence to provide credit (the "Licence to Provide Credit"). The licensing requirement is triggered when the services are provided in Israel, as well as when clients are actively solicited in Israel in connection with services provide from overseas.

Regulations enacted under the Financial Services Law set forth certain exemptions from such licensing requirement. The main exemptions apply to foreign corporations which comply with the following conditions: (i) they are incorporated in OECD member countries; (ii) they hold a banking licence from a regulatory authority in an OECD member country; (iii) they are subject to an anti-money laundering regime in such country; and (iv) they are not required to obtain a licence under the Banking Law (Licensing), 5741- 1981. Another important exemption relates to lenders who lend solely to business borrowers in loan amounts exceeding ILS3 million. The Exemption Regulations are currently in force until June 16, 2020, and are expected to be extended thereafter.

Brokerage Activities in Israel

In 2019 Section 49A of the Israeli Securities Law entered into effect, under which it is prohibited to offer trading services in Israel with respect to securities listed on exchanges and trading systems (other than the Tel Aviv Stock Exchange) without a permit granted by the Israeli Securities Authority ("ISA").

In light of Section 49A, there are essentially two alternatives for foreign entities wishing to provide brokerage services to Israeli customers:

(i) to provide services only to clients which are "Qualified Investors". Qualified Investors include institutional investors, large companies and high net worth individuals, as set forth under the Israeli Securities Law. This alternative does not require entities to submit an application to the ISA

(ii) Entities regulated under certain jurisdictions may apply to the ISA and request a permit to serve Israeli clients, including non-Qualified Investors. This route is currently available to non-Israeli entities which are subject to regulation (a) in the USA as a 'broker-dealer'; (b) in an EU country under MiFID II as an 'investment firm' or a 'credit institution', or (c) Swiss-licensed banks authorized as 'securities dealers' under applicable Swiss law, provided that under the applicable regulation to which such entity is subject, the fact that the customer is located in Israel does not derogate from their duties to the clients under such regulation.

Entities licensed in other jurisdictions (i.e. not in the USA or the EU) may also apply to the ISA for a special permit. In the application, they must describe the regulatory regime applicable to them, the supervision on their brokerage activities and their duties under the foreign law vis-à-vis clients located in Israel.

ISDA Agreements

Over-the-counter derivative transactions have also become common in recent years and many Israeli banks and institutional investors, as well as companies that need to hedge exposure to currencies and commodities, are entering into derivative transactions under the ISDA Master Agreement with international counterparties.

The Digital Bank

On 2019, the Bank of Israel agreed to grant a licence to a new bank, after many years on which no new banking licence was granted. The new bank plans to operate as a digital bank, namely without branches or physical establishments.

Originally published by Chambers & Partners on 26th of April, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.