requires. it is clear that under such conditions monetary control may be affected. · the instruments of absorption available to the bank of israel to neutralize the injection deriving from the purchase of foreign currency are in the form of the banks ’ deposits in the bank. the banks already deposit about a fifth of their unindexed sources in the bank of israel as a result of the problematic defense of the lower limit of the band in the years 1995 – 97. a recurrence of such an episode would increase the banks ’ dependence on the bank of israel, a complete contradiction of the successful policy of deregulation pursued in the first half of the 1990s. such increased dependence may raise questions concerning the banks ’ stability. · under such circumstances the bank of israel would again have to choose how to deal with the losses inherent in such an activity. it could transfer them to the banks by paying them a similar rate of interest on their nis deposits in the bank of israel to the rate it receives on its foreign - currency investments. the banks would of course pass this on to their customers by cutting the interest they pay their depositors and raising the interest they charge borrowers. and then there would be complaints about the high banking spread. alternatively, the bank of israel could record the losses in its books, as it did on the previous occasion. in the final analysis this cost is of course borne by the taxpayer, and i believe that the last thing the government wants to do is to raise the tax burden in such a roundabout way. we should bear in mind that we cannot evaluate in advance the importance of such a course of action. we know that on the last occasion, the bank of israel purchased $ 16. 5 billion. an increase of only $ 1 billion in the money supply would currently mean a rise of about 4 percent, whereas an annual increase of 10 percent is considered too fast. the simplest solution is to abolish the exchange - rate band. if the bank of israel has to defend it, the end result would be its abolition in any case, but after incurring a high and unnecessary price. it is preferable to take such a step on our own initiative, and not under pressure from the market. 3. the ceiling on treasury bills issues by law treasury bills are an instrument for carrying out monetary policy, but we cannot fully use them for this purpose because the creator of the tool also limited its quantity. in other words : yes, you have an inflation target.

the twin peaks model. this model separates the two functions of financial supervision : i. supervision of financial institutions ’ risk management ( prudential supervision ) ; ii. supervision of conduct of business, covering such subjects as transparency and full disclosure by institutions, fair relations between them and their customers, and consumer protection. in the netherlands, the supervision of financial institutions ’ risk management is the responsibility of the central bank, while supervision of business conduct is performed by a separate authority. another model is the irish one, where the central bank supervises both financial institutions ’ risk management and their business conduct. in australia, in contrast, the central bank is not responsible for either supervision of risk management by financial institutions or their business conduct. if the bank of israel is given the responsibility for the supervision of financial institutions, it would be advisable to adopt the functional supervision approach, in other words, to separate the two supervisory functions – the supervision of financial institutions ’ risk management and the supervision of their business conduct. later, after some years ’ experience, the situation can be reviewed, and the question considered of whether supervision of business conduct should be transferred from the bank of israel to a new authority that would be established specifically for that purpose. to conclude : financial supervision is one of the most important issues affecting the functioning and development of the financial markets and the economy as a whole. in israel the issue assumed even greater import with the implementation of the recommendations of the bachar committee, and at this time it has come to the fore again in light of the implications of the global financial crisis. after examining the question very closely, and taking into consideration the conclusions being drawn in the major financial institutions around the world, we recommend that the supervision of banks be merged with the supervision of insurance, provident funds and pension funds, within the bank of israel. it is advisable to switch then to the functional supervision approach, i. e., to distinguish between the supervision of risk management in financial institutions and supervision of their business conduct. at a later stage, after some years, we can examine the question of whether the supervision of business conduct should be transferred from the bank of israel to another authority.