stanley fischer : corporate governance in israel summary of the address by professor stanley fischer, governor of the bank of israel, to the general assembly of the association of publicly traded companies, jerusalem, 23 december 2010. * * * i would like to talk of three issues relating to corporate governance in different economic entities in israel. the bank of israel will soon undergo a significant change in the way it makes its decisions. till now, the governor has had sole responsibility for interest rate decisions. that situation was the result of, among other things, the generally accepted practice around the world when the bank of israel was established, and also of the outstanding personality of the first governor, mr. david horowitz. there are still today several central banks in which the governor formally makes the decision alone. however, i do not know a single governor who actually does decide entirely by himself. in the bank of israel, for example, there is a set mechanism of the monetary discussion in a narrow forum, in which a discussion is held at the highest professional level. research has shown that on average group decisions are better than decisions taken by one person. the fact that, till now, one person makes operational decisions in the bank of israel, and that there is no board of directors as there is in public companies, is certainly not the ideal situation. the new bank of israel law states that the bank of israel will have a monetary committee that will make the policy decisions and an administrative council that will make the operational decisions. as well as managers from the bank of israel, the committee and council will have representatives of the public. the government has appointed a search committee under retired judge winograd charged with putting forward a list of candidates for these entities. the search committee is required to consult with the governor about the proposed members of the committee and council, but the final decision is that of the government. i hope that members of the two bodies will be appointed soon, and i am sure that the decisions they will take in the new system in the bank of israel will be better. the second subject i would like to speak about is corporate governance in the banking system. the crisis greatly deepened our understanding of the need to strengthen corporate governance in banks. the main measures introduced in israel in this context are based on the basle committee on banking supervision and on the financial stability board. the most important topic on which our attention is focused is an update of directive no. 301 in the proper conduct of banking business, which deals with several

, in the reserve bank, we believe this is “ responsible financial regulation ”. conclusion 57. let me now conclude by summarizing what i ’ ve said so far. i started with explaining the logic for regulation in general and then explaining how the financial sector is unique, requiring a different and more careful balance between regulating for stability and safety and encouraging innovation. i then spoke about good and bad financial innovations ; and how good innovations are those which add value to the real sectors of the economy. after that, i explained the reserve bank ’ s approach to responsible regulation and illustrated this with examples from several activities of the reserve bank. finally, i posed a question – “ does regulation have a role in achieving equity? ”, explained the reserve bank ’ s approach to that question even as i may have raised some new questions in the process. 58. last year, the reserve bank was awarded the dufrenoy prize for responsible innovation by the observatory for responsible innovation in paris. the dufrenoy prize was instituted jointly by the observatory for responsible financial innovation and mines paris tech, a well - known education and research institution set up in paris in 1783 to recognize remarkable and outstanding initiatives in the area of responsible innovation in finance. 59. the dufrenoy prize was awarded to the reserve bank for its calibrated approach to the introduction and regulation of financial products. let me quote from the citation : “ the responsible character of the reserve bank of india ’ s commitment in the financial services industry lies in an original and innovative regulatory approach of financial products. one of the bank ’ s priorities has been to calibrate the introduction of specific financial innovations in order to assess their behaviour before larger scale diffusion, a pioneering approach at a time when the idea of considering markets as real scale testing sites for financial innovation with the necessity of implementing specific protocols is not yet prevalent in the financial area. the rbi ’ s calibrated approach introduces elements.... a series of precautions, and pre - marketing and post - marketing surveillance that can stand as exceptional benchmarks for other countries. ” 60. the award of the dufrenoy prize pleased us immensely. but it also reminded us of our responsibility – of ensuring that we continue to encourage innovation in the financial sector without compromising financial stability and consumer protection. in the reserve bank, we are aware that we are not yet the “ best practice ” in this regard, but will spare no effort to get there. bis central bankers ’ speeches 61