Banking Regulation in Israel. Prudential Regulation versus Consumer Protection. Ruth Plato-Shinar

Transcription

1 Banking Regulation in Israel Prudential Regulation versus Consumer Protection Ruth Plato-Shinar Wolters Kluwer

2 Foreword Preface Acknowledgements List of Abbreviations xiii xvii xxi xxiii CHARTER 1 Banking Regulation Regulation: A Conceptual Introduction Rationales for Banking Regulation 4 [A] The Central Role of the Banks in the Economy 4 [B] Sensitivity to Shocks 5 [C] Dependence on Public Confidence 7 [D] Information Asymmetries 8 [E] Tendency to Take Risks 8 [F] Concentration of Power Areas of Banking Regulation 10 [A] Prudential Regulation 10 [B] Conduct of Business Regulation Banking Regulation in Israel: Scope and Definitions 14 [A] The Banking Regulator 14 [B] The Supervised Institutions 16 [C] The Main Functions of the Regulatory Activity 16 CHARTER 2 The Israeli Banking System and Its Supervision The Israeli Capital Market and the Role of the Banks in It 23 [A] Introduction 23 vii

3 [B] The Capital Market Reform of [C] The Corporate Bond Market 24 [D] The Business Lending Market 27 [E] The Retail Lending Market 29 [F] Securitization The Israeli Banking System 31 [A] The Banks 31 [B] Credit Card Companies 34 [C] Electronic Payment Card Clearing Companies Ownership of Israeli Banks: From Nationalization to Privatization The Israeli Banks as Quasi-Public Bodies Concentration and Lack of Competition 45 [A] Entry Barriers Pacing New Players 45 [B] Switching Barriers 46 [C] Information Barriers 48 [D] Lack of Price Competition Conflicts of Interest in the Banking Activity 51 [A] Conflicts of Interest Resulting from Universal Banking 51 [B] Conflicts of Interest in Investment Counseling 54 [C] External Intervention in Gases of Conflicts of Interest 57 [1] The Drastic Solutions: Compulsory Sale of Subsidiaries and Prohibition on Certain Areas of Activity 57 [2] "Chinese Walls" 60 [3] Disclosure and Consent The Banking Regulation Framework 66 [A] Standard-Setting Powers 67 [B] Licensing Powers 68 [C] Monitoring Powers 68 [D] Enforcement and Sanctions 71 [E] New Models of Banking Regulation 73 [1] Regulatory Cooperation 73 [2] Voluntary Self-Regulation 75 [3] Mandatory Self-Regulation 76 [4] Contractual Regulation 77 [F] The Compliance Function 78 [G] Complaint Handling 80 CHAPTER 3 Prudential Regulation Stability as the Ultimate Objective 84 [A] The Supervisor of Banks' Approach 84 [B] The Approach of the Supreme Court The Global Financial Crisis and Its Lessens for the Israeli Banking System 89 viii

4 3.03 Prudential Regulation in Israel 91 [A] Adopting the Basel Accords 91 [B] Capital Adequacy 93 [C] Liquidity 94 [D] Limitations on Leverage 96 [E] Risk Management 97 [F] Credit Risk Management and Limitations on Credit Provision 98 [1] Credit Risk Management 98 [2] Limitations on the Indebtedness of a Borrower and a Group of Borrowers 100 [3] Business with Related Parties 100 [4] Leveraged Lending 101 [5] Limitations on Financing Capital Transactions 102 [6] Credit Facilities in Current Accounts 102 [7] Limitations on Providing Housing Loans 103 [G] The Risk of Embezzlement Crisis Management and Bank Rescues (Recovery and Resolution) 107 [A] General Principles 107 [B] Early Intervention 109 [C] Handling Bank Failures 110 [1] The Powers of the Bank of Israel's Governor 110 [2] The Special Examiner 111 [3] The Administrator 111 [4] The Management Committee 112 [5] Releasing the Bank from Its Obligations 113 [6] Conclusions 114 [D] Safety Nets 116 [1] General Principles 116 [2] LOLR 119 [3] Lack of Deposit Insurance Scheme 120 [4] Ad hoc Guarantee for Bank Obligations ("Implied Insurance") 124 CHAPTER 4 Conduct of Business Regulation Justifications for Conduct of Business Regulation 128 [A] Disparity of Power 128 [B] The Customer's Dependence on the Bank 130 [1] The Provision of the Service 131 [2] The Manner of the Performance of the Service 131 [3] The Prices of the Banking Services 132 [4] Determining the Legal Rule that applies to the Relationship 132 [5] The Difficulty in Switching Banks 132 ix

5 [C] The Bank's Control over the Customer's Affairs [D] The Customer's Confidence in the Bank 4.02 The Supervisor of Banks' Authority and Approach re Consumer Protection 4.03 Banking (Service to Customer) Law, Supervision of Bank Pees 4.05 Directives of the Supervisor of Banks with Respect to Consumer Protection [A] The Right to Open and Run Current Accounts [B] Transferring Activity from Bank to Bank [C] Account Opening via the Internet [D] "Bank Identity Card" (Credit History Report) [E] Fairness in Debt Collection Proceedings [F] Limitations on Credit Marketing [G] Complaint Handling and Redress [H] Promoting the Use of Debit Cards [I] Borrowers Protection in Respect of Housing Loans [J] Construction Loans: Protection of Home Buyers 4.06 Discriminatory Clauses in Standard Bank Contracts CHAPTER 5 Prudential Regulation versus Conduct of Business Regulation: Consolidation or Separation? The Current Balance between Prudential Regulation and Conduct of Business Regulation Optional Regulatory Models Regulatory Effectiveness in Terms of Achieving the Objectives 179 [A] Considerations that Support Splitting the Powers 179 [B] Considerations that Support Consolidation of Powers Regulatory Expertise 185 [A] Considerations that Support Splitting the Powers 185 [B] Considerations that Support Consolidation of Powers Regulatory Power 187 [A] Considerations in Support of Splitting the Powers 187 [B] Considerations in Support of Consolidating the Powers Operational Efficiency of the Regulatory Mechanism The Impact of Regulation on the Supervised Institutions The Ramifications of a Financial Regulatory Reform The Preferred Model for Israel 193 [A] Israel: Synergy of the Regulatory Objectives 194 [B] Israel: The Optimal Balance between the Contradictory Objectives 196 [C] Israel: High Level of Expertise 197 [D] Israel: The Advantages of Power 201 [E] Israel: The Significance of Implementing the Reform 205 x

6 CHARTER 6 Banking Regulation in Israel: The Way Forward Balancing Prudential Regulation and Conduct of Business Regulation Operational Recommendations for Strengthening Consumer Protection 214 [A] Amending the Bank of IsraeTs Objectives in the Bank of Israel Law 214 [B] Structural Change in the Banking Supervision Department 215 [C] Strengthening Consumer Enforcement 217 [D] Cooperation between Financial Regulators in Consumer Matters 217 [E] Duty to Consult with the Public When Determining Consumer Provisions The Main Challenge: Developing Effective Competition in the Field of Banking 219 [A] Separation of the Credit Card Companies from the Banks 222 [B] Competition in the Field on Clearing 224 [C] Retail Lending by Institutional Investors 226 [D] Allowing Non-bank Lenders to Issue Bonds 226 [E] The Fair Credit Bill 228 [F] Credit Data Sharing System 231 [G] Conclusion 233 Bibliography 235 Table of Cases 261 Table of Regulatory Instruments 265 Table of Statutory Instruments 277 Index 289 xi