karnit flug : implementing reform benefitting the public in israel remarks by dr karnit flug, governor of the bank of israel, at the knesset reforms committee, tel aviv, 14 december 2016. * * * mr. chairperson, honored members of knesset : i have come here today, moments before the vote on the law, to say several things : together, we have advanced a very significant and extensive reform, which was formulated through agreement after about a year of discussions. the bank of israel leads and will continue to lead this reform, professionally, with integrity, and focusing exclusively on the benefit of the public. the bank of israel has in fact already adopted very important steps to begin implementing the reform, some of them even before the strum committee completed its work ( for example, defining the terms for control of acquirers by the entities that will buy the credit card companies ), and others even before the legislative process was completed ( for example, the directive to separate the boards of directors of credit card companies from those of the banks that control them ). there are several reservations, not all of which were examined sufficiently deeply. for some of them, it is quite probable that their negative impact will outweigh their benefit — referring, of course, to the negative impact to the public. it is important to explain that ultimately it will be the bank of israel that will be charged with the responsibility to implement most parts of the reform, so it is therefore important that the bank of israel will lead, together with the ministry of finance and the ministry of justice, the enactment of the regulations in various areas. specifically, with regard to the financial information sharing law, i note that several days ago we discussed the issue, in view of its complexity, and formulated an agreement — the minister of finance, me, committee chairperson eli cohen, and others — on the outline that we felt is responsible and appropriate. this outline is completely undone in the proposal, that i am surprised to understand the ministry of finance and the committee chairperson support, on which you are about to vote. i will explain : the addition of information on interest on credit facilities to the section dealing with the sharing of financial information is meant to serve precisely the same end that the credit data law is meant to serve, which is to lead to enhanced competition in credit. it is absolutely clear that including this information adversely impacts the realization of the objective of the credit data law. this negative impact was focused on yesterday by the deputy

for bad assets as soon as there are problems in the financial markets. of course, we want to avoid such situations in the future, and this is why the basel committee has produced a number of regulations aimed at making the banks less sensitive to liquidity problems. so what do the regulations entail? in future, a certain part of the borrowing must be longer term. moreover, it must come from more stable sources of funding. in concrete terms, the regulations mean that one multiplies the amount the bank borrows from each type of funding source by a stability factor – in roughly the same way as for risk adjustment of the value of assets when calculating capital requirements. this gives a stability - adjusted funding profile for each institution that should better match the maturities for the banks ’ lending. one will also require that a certain percentage of the banks ’ assets are liquid, in the sense that they can be converted into cash relatively easily. this reduces the banks ’ vulnerability to sudden outflows of funds deposited or maturities of loans that cannot be rolled. put simply, they require that the bank holds a liquidity buffer. the size of the buffer is calculated to ensure that the bank can manage a 30 - day period with very large withdrawals of deposits and substantial loan maturities. these two regulations – on liquidity buffers and more stable sources of funding – entail less risk that the banks will be taken by surprise as they were during the financial crisis. but above all the regulations will lessen the contagion effects on the markets. stable liquidity management reduces the risk of turbulence in individual markets or banks quickly spreading and creating financial problems for other banks. stricter risk management the third part of the basel committee ’ s reform package concerns what is perhaps the most important mainstay of the banks – the way they manage their risks. if risk management is inadequate, having plenty of capital or apparently good liquidity management will not help. risk management mainly concerns credit risks and market risks. credit risk means that a borrower is unable to repay his or her loan. market risk is the risk that the bank ’ s assets will vary in value in a way that was not anticipated, and this makes it difficult for the bank to get hold of capital without making a loss. for example, fluctuations in interest rates and exchange rates can affect the value of the assets. in addition to these risks, there are what are known as operational risks. this can involve, for instance, a technical system