stanley fischer : israel ’ s banking system and economy address by professor stanley fischer, governor of the bank of israel, to the annual conference of the association of banks, tel aviv, 23 december 2008. * * * the annual conference of the association of banks is taking place this year while we are experiencing one of the worst financial crises in modern times. the global banking system is at the center of the crisis, and it is reflected in the advanced economies not only in sharp falls in prices of shares and private bonds, but also in shocks to the banking system, to the extent that more than few commercial banks and investment banks have actually collapsed. our situation is different. israel's banking system is strong, and depositors can continue to have confidence in israel's banks. the global financial crisis is not leaving israel's banking system entirely unscathed, however, and its effects are being felt, among other things, in the area of risks confronting the economy and the banks. one of the salient risks is that of a possible increase in problem loans, a characteristic feature in periods of slowdown in economic growth. that said, the stability of the banking system is being maintained, and so far its exposure to the financial storm has been relatively limited. that may be attributed to the high level of professionalism of the supervisor of banks and his staff, and the welcomely high degree of conservatism of israeli banks, relative to that in many other countries. it is due to that conservatism that the dangerous developments that occurred in the area of mortgages in the us and other countries have hardly been seen here. in light of the crisis the bank supervision department is making every effort to intensify and extend its regular monitoring of developments in each and every bank and in the banking system as a whole. you, the banks, are certainly conscious of the supervisor's hand on your pulse all the time, and certainly appreciate the expediency of that intensive activity vis - a - vis the banking system and the whole economy. in addition, the bank announced that it is ready to help the banks with all the means at its disposal, as necessary, in order to support depositors. at the same time the government announced that out of concern for the public's deposits and to ensure the public's confidence in the financial system, it will stand behind the stability of the financial system. it went on to emphasize that for sixty years depositor holders have not been

, while on the other you impose limits in order to make it more difficult to attain. the quantitative restriction on treasury bill issues does indeed hamper monetary policy, as it obliges us as policymakers to influence the market via the banks. as a method, this is very expensive and not very efficient. its practical significance is that the economy has to function with a higher interest rate in order to maintain price stability, so that the country pays unnecessarily for this restriction. no less important, however, is the effect of the treasury bill ceiling in checking the development of the money market as a substitute for banking intermediation. the absence of a deep treasury bill market is one of the reasons for the spread in the unindexed localcurrency segment and for the absence of a market for short - term corporate bonds based on treasury bill prices. the upshot is that anyone depositing money in a bank receives lower interest, while borrowers pay higher interest. this does further - and quite superfluous - harm to the capital market and the economy. 5. annulling tax distortions on individuals ’ financial income received directly and via institutional investors : because of the attempts to connect these changes with a ‘ large ’ tax reform that also addresses taxation on work income, this subject has also come to a halt. what we are talking about here is equalizing tax rates and making taxation dependent as far as possible on nominal income, and these changes should be neutral as far as government revenues are concerned. there are intolerable gaps in israel today between taxation on income from different financial instruments, as well as between taxation on investment in israel and abroad. these distortions must be removed in order to bolster financial stability and make the financial markets more competitive. in some cases it is necessary to increase the tax rate, and in others to reduce it, and the combined results need not necessarily affect government revenues. 6. establishing a joint body to coordinate the various authorities supervising the financial markets : obscuring the limits between the various spheres of activity of israel ’ s financial institutions, as well as israel ’ s integration within the global economy – including the involvement of foreign financial institutions in the domestic market – require greater coordination and exchange of information between the supervisory bodies in order to make the system more efficient. several financial crises have developed due to the exploitation of the boundaries between the various supervisory bodies. in the last decade israel ’ s governments have adopted the norms of macroeconomic management that