stanley fischer : impact of the global financial crisis on israel ’ s economy address by professor stanley fischer, governor of the bank of israel, to the general assembly of the association of publicly traded companies, jerusalem, 8 december 2008. * * * for more than a year the world has been confronting one of the worst financial crises in over seventy years. this crisis has two phases : the first, financial, and the second, real, in other words a significant slowdown, and possibly even a global recession. both the financial and real effects of the global financial crisis on israel's economy are clearly evident. i would like to stress, however, that israel entered this period in a more favorable state than that in most other countries. on the financial side the crisis is reflected in israel mainly by the fall in prices of shares and corporate bonds, unlike in the advanced and other economies. in addition, the rate of growth declined to 2. 3 percent ( annual rate ) in the third quarter, and it is expected that the slowdown in israel's growth rate will continue, i. e., growth will remain positive, but will slow further, ( to 1. 5 percent in 2009 ), as opposed to a more significant slowdown, or even a recession, in the advanced economies. israel's relatively favorable situation is due to several factors : 1 ) the government's fiscal policy in the last few years was a responsible one. 2 ) the bank of israel ’ s interest rate policy supported financial stability and the ability of the economy to deal successfully with the effects of the slowdown in growth. this, without acting counter to the return of inflation to within the target range. 3 ) a surplus has been created in the current account of the balance of payments. 4 ) israel's foreign exchange reserves are high and rising, as a result of the bank of israel's plan to increase them. 5 ) the levels of growth and employment were high at the onset of the crisis. 6 ) israel's banking system is strong and stable compared with those of the advanced economies. 7 ) israel's capital market did not develop advanced, complex financial instruments whose inherent risk levels are difficult to assess. 8 ) the average debt burden of companies and households is relatively low. the challenge at present is to preserve the economy's relatively favorable position, to take advantage of it to deal with the new situation, and to introduce the measures needed to escape from the period of slowdown without harm

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.