find ways to strengthen their ability to compete with the big banks, including via mergers. the following serious questions arise in the course of discussions of the capital market reform : a. the stability of the banking system. i think that this will not be affected by the separation of the provident funds and mutual funds from the banks. the stability of the system depends on the quality of the asset portfolios held by the banks and the manner in which they manage them. i believe that when the banks focus on classic banking they will manage their portfolios even more efficiently than they do today. i am not saying that the banks are inefficient now ; i am saying that they will become even more efficient. b. the stability of the financial system. in this regard too i see a great advantage in separating the funds from the banks. during the severe global financial crises in the 1990s we discovered that the broader the range of financial institutions a country had without any institution being dominant, the more stable was its financial system. this is the case because a problem experienced in one sector did not roll over into other sectors, and the system benefited from the flexibility to act efficiently. when our financial system is more diverse, we can have greater confidence in it. c. the concentration among banks. it is true that from the customers'point of view, initially there will not be any great changes. nevertheless, the reform will reduce the dominance of the large banks in relation to the others, and this will eventually be reflected in a more competitive system. one important aspect of the bill placed before you as part of the reform of the capital market is the supervisory aspect. it is clear that this subject comprises an important basis for the reform of the capital market. on the one hand we hope to create a foundation in which the market – – when it is competitive and free from conflicts of interest – – will constitute an effective supervisory mechanism, but on the other hand we must strengthen the supervisory setup in order to ensure that the capital market really is more competitive and free from potential conflicts of interest. we therefore suggest that within the framework of the proposed legislation that you are considering, the banking ordinance should incorporate the authority of the supervisor of banks to issue directives on the proper conduct of banking business. this he would do after consultation with the bank's advisory committee and with the approval of the governor. with regard to the concentration in the banking system, the supervisor of banks is working to make it easier to move from one

erecting firewalls. by the way, that is what was done also in the us. but as we were to discover eventually, these firewalls in israel were not effective enough, and all attempts to shore them up and increase their effectiveness were unsuccessful. in the us, because the banks – – even the big ones, even citigroup – – are small in relation to the financial system and are not dominant in it, the firewalls worked, and market forces resulted in a bank like citigroup deciding to sell its insurance company and its funds, for economic reasons. in israel we have tried various methods of solving the problem, including firewalls, but without success. this is because the banks remained as dominant as they had been. that is why the bachar committee opted, and rightly so, to go in the direction of legislation. i hope that in time, once the reform has been carried out, when the banks in israel are less dominant, market forces and economic considerations will also make the banks realize that it was not worth their while to hold a range of financial products, but to focus on areas where they have a comparative advantage. then we can claim that the reform was really successful. thank you very much.