abroad. before turning to the new law, i will mention two basic changes in central bank thinking over the last twenty years : ( 1 ) the emphasis on the independence of the central bank as a major component of its success in fulfilling its functions and achieving its targets ; and ( 2 ) the need for central bank transparency and accountability in its interest rate policy, including the analysis of the information it had available that provided the basis for its decision, and the results of its interest policy. i. central bank independence studies were carried out in the 1990s, among others by prof. cukierman, to examine and make international comparisons regarding the link between central bank independence, inflation, and economic growth. the significance of the concept of independence in the context of a central bank is that it has the authority to make its decisions without needing to obtain any external confirmation or approval. the research findings were clear : the relation between central bank independence and inflation is a negative one, and this, without paying a price in terms of growth. in other words, countries that reinforce their central banks ’ independence attain low inflation with no impairment to growth. this lesson and experience gained in countries with independent central banks, particularly in germany, also influenced decision makers. with the establishment of the european monetary union, the founding of the new republics following the collapse of the soviet union, and the process of democratization in latin america, new laws were enacted relating to many central banks, and in all cases, the emphasis was on their independence. the best known and most impressive instance is that of the bank of england : the first economic decision taken by the new labour government after the election in 1997 was to grant independence to the bank of england. till then the central bank had not been independent, and decisions on the interest rate were taken by the treasury. it is clear from the marked improvement in the performance of the uk economy over the last ten years, with regard to both inflation and steady growth, that the decision was wise and justified. the independence of a central bank is very important for its success in performing its functions and achieving its objectives. this is because democratic governments have an “ inflation bias, ” for two main reasons : a. since an expansionary interest rate policy, i. e., lowering the interest rate, tends to have a positive effect on gdp and only later does it contribute to higher inflation, and since democratic governments generally have a short horizon, they prefer to reduce interest rates, particularly when there are elections looming. an

to earn a return on their capital. in this context, i would like to refer to the banks'profits. it is quite natural to regard the banks'profits in nominal terms of billions of shekels, but one should also examine the banks'profits in relation to their capital, in other words, one should look at their return on capital. in these terms, the return on capital for the israeli banking system is not particularly high, and even low in international comparison. the return on capital for the banking system in 2005, for example, was 14. 5 percent, compared to an average 15. 4 percent globally. finally i would like to ask the knesset to push forward with government - sponsored legislation on the supervision of banking fees by the supervisor of banks as soon as the bill is presented, which i hope will be soon. this is an important bill, and every effort should be made to have this legislation passed.