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.

david klein : the changing exchange rate regime - background, policy and implications ; the case of israel speech by mr david klein, governor of the bank of israel, at the euro - mediterranean seminar, eurosystem and mediterranean country national central banks, organised by the bank of italy and the european central bank, naples, 14 - 15 january 2004. * * * the exchange rate regime is an important component of macro - economic policy. after experiencing a period of sluggish growth and rapid inflation in the ‘ 70s and the first half of the ‘ 80s of the last century, israel changed its economic strategy. in a series of agreements with the european union and the united states, all barriers to international trade were removed. unilaterally israel removed those barriers on trade with other countries as well, and cemented all these changes in a number of agreements in the framework of the wto and by accepting article 8 of the imf articles of agreement. furthermore, in the ‘ 90s and the first few years of this decade, israel gradually abolished all exchange controls. the concept behind this economic strategy was that a small economy like that of israel, can exhaust its growth potential only by being open to the world. as a result of this basic strategy, the central bank, which was its main promoter, had to overhaul its policy to maintain price and financial stability. the change entailed replacing the exchange rate by an inflation target as the nominal anchor. to do that a few steps had to be implemented simultaneously : first, to render the exchange rate regime more flexible. we realized that removing exchange controls would make it difficult, if not impossible, to maintain a fixed exchange rate. this meant moving from a fixed exchange rate regime through a horizontal exchange rate band, to an upward sloping diagonal band, to an ever - widening band and, finally, to a floating exchange rate regime. the gradual approach was required to give time to an inter - bank foreign currency market to develop, including the creation of financial instruments, traded and over the counter, to hedge against the exchange rate risk. second, in order to go along with the lifting of the foreign exchange controls, the central bank and the government had to implement an extensive deregulation of the domestic money and capital markets. this meant abolishing numerous directed credit facilities, and extensive commercialization of government debt in the framework of capital market reform. third, working with inflation and price stability targets required shaping of appropriate monetary policy instruments. in this context we scraped the