stanley fischer : the israeli economy, its banking system and basel ii address by professor stanley fischer, governor of the bank of israel, to the conference of the association of banks, tel aviv, 25 december 2007. * * * today i will first speak about the state of the economy in israel, and about the banking system as an important part of the economy ; then i will talk of the bank of israel ’ s activity regarding competition in the banking system ; and finally i will turn to basel ii. 1. the state of the economy israel ’ s economy is in a very good situation, and growth this year is expected to be 5. 4 percent, or even slightly higher. exports have risen rapidly, the current account of the balance of payments is showing a surplus of 4 percent of gdp, the debt / gdp ratio has fallen to about 82 percent of gdp, compared with about 102 percent in 2003, the strong inflow of foreign investment in israel is continuing, unemployment is declining, and according to quarterly figures has already reached 7. 3 percent, down from about 11 percent in 2003, the rate of participation in the labor market is rising, price stability has been maintained, and both financial and economic stability have been preserved. at the present time, the inflation rate is slightly higher than the upper bound of the target range, but it is expected to return to the target by around the middle of next year. the bank of israel, for its part, will make every effort to ensure this outcome. the auspicious state of the economy is reflected in the oecd ’ s invitation to israel to start the process of joining the organization, the improved credit rating granted to israel, the agreement of the us government to continue providing us with loan guarantees, and the report of the imf delegation that visited israel this month. nevertheless, the future looks less rosy : it appears that the financial crisis in the us and europe will become more severe. the central banks are searching for the right tools to deal with the problems of liquidity, and as a result of the difficulties in the financial markets the gaps between central banks ’ interest rates and market rates are widening. the first signs of the fruits of the central banks ’ efforts are becoming visible. if this continues, the interest rate gaps will again become more reasonable, but even then the problem of the collapse of the us housing market and its implications for the economy will remain. till now there has been no evidence of a slowdown in the us economy.

advanced approach to bank management and supervision, based on the establishment of risk - management systems rather than detailed rules. this requires the banks to invest much effort in setting up sophisticated information and management systems and an extensive database. the banking supervision department is devoting many resources to this subject. the supervisor of banks has already published a schedule and delineated the path to be followed in preparing for and completing the adoption of basel ii. this is an ambitious project, and it is very important that we succeed in implementing it. adopting the basel ii principles and those of sox 404 will improve overall management – and in particular risk management – and banks ’ control, and will institute the highest international standards in israel ’ s banking system. i hope that next year we will be able to stand on this platform and look back and see how much we have progressed in this vital aspect of banking, and in particular with regard to the competitiveness, efficiency, and robustness of the banking system. thank you.