Israel: Banking & Finance

The main national authority for banking regulation and supervision in Israel is the Bank of Israel (the “BOI”), which regulates and supervises the licensing applicable to banking entities in Israel, subject to the Israeli Banking Law (License), 1981 (“The Banking Law”). Other laws which regulate the activity of banks in Israel are: The Banking Ordinance, 1941 (“The Banking Ordinance”) and The Banking Law (Service to Customer), 1981 (“The Banking Law (Service to Customer)”).

In addition, there are other banking activities in Israel which are regulated and supervised by two other authorities: Investment Advice, Investment Marketing and Portfolio Management activities are regulated by the Israeli Securities Authority (the “ISA”); while some Financial Assets Services and the non – banking Credit Extension are regulated by the Israeli Capital Market, Insurance and Savings Authority (the “CMISA”).

During the last years, new proposals have been proposed to change the authorities who regulates the Israeli growing fintech industry.

Under The Banking Law, the following activities may only be carried out by a banking corporation licensed under The Banking Law (a “Banking Corporation”), thus trigger the requirement of a banking license:

1. Accepting deposits, subject to withdrawal by cheque upon demand, in current accounts;
2. Both the acceptance of money deposits from thirty persons or more at one time and the grant of credit (subject to certain exceptions); and
3. Both the issuance of securities requiring a prospectus under Israeli law, and the grant of credit (subject to certain exceptions).

While there are certain activities that may only be carried out by a Banking Corporation (as detailed above), certain banking services can be carried out under different licenses. The BOI can grant, besides a Bank license, a Mortgage Bank license, a Foreign Bank license, and a Financial Institution license.

Foreign Bank License

Non-Israeli banks can operate in Israel in two basic forms: (1) obtaining a foreign banking license (2) establishing a representative office (see answer 9 below). A non-Israeli corporation which is a licensed bank in a foreign country, can receive from the Governor, a foreign banking license (“Foreign Bank”).
Under The Banking Law a Foreign Bank shall engage only in the activities which are permitted to Banking Corporations in Israel.

Note that the BOI is also authorized to grant a clearing activity license for credit card companies and to
monitor their activities.

The Banking Law sets out the activities a Banking Corporation may carry on in Israel. This is a closed list that defines what a bank is entitled to engage in. The list includes, inter alia:

The acceptance of money deposits in current accounts, subject to withdrawal by check upon demand; the acceptance of other money deposits; the issue of securities; maintenance of a system of payments; purchase and sale of foreign currency; the granting of credit; investments in securities; the safekeeping
and administration, as an agent, bailee, dealer or trustee, and excluding the granting of underwriting obligation, the management of a provident fund, the management of a mutual joint investment fund, and management of portfolios management ;the purchase and sale of securities as a dealer or agent; broking
in financial and economic transactions in the sphere of its business; pension Advice and also the performance of a transaction for a client, as these terms are defined in the Pension Advice and Marketing Law; Investment advice and Investment Marketing according to the Investment Advice, Investment
Marketing and Investment Portfolio Management Law, 1995 (the “Investment Advice Law”).

A Banking license automatically permits a Banking Corporation to engage in the activities detailed in the list above. Investment Advice services are included in the list above but are also regulated under the Investment Advice Law. Generally, under the Investment Advice Law, a bank, and any other Banking Corporation which is authorized to do so pursuant to The Banking Law may engage in Investment Advice without obtaining a license; however, those engaging in Investment Advice on behalf of the bank must be employees of the bank or Banking Corporation, who are either licensed advisers or authorized to engage in Investment Advice without a license pursuant to the Investment Advice Law. Note, that the Investment Advice Law prohibits banks themselves from engaging in Portfolio Management activities (however they may control a separate portfolio management company). Recently the Ministry of Finance published a draft Memorandum of Law: The Securities Law (Broker Dealer Activity Regulation), 2020 (the “Memorandum”) with an aim to regulate the Broker-Dealers activities in Israel and to subject the persons and entities engaging in such activities to the supervision of the ISA. The Memorandum also stipulates that, among others, a Banking Corporation, an Auxiliary Banking Corporation, and any other corporation supervised by the BOI in connection with its activities of Broker-Dealers shall be exempted from the obligation to obtain a license from the ISA. Furthermore, it is proposed to exempt foreign Broker-Dealer licensees which engage in the offering and rendering of brokerage services to qualified clients that meet the conditions specified under the First Supplement to the Israeli Securities Law, 1968 (“The Securities Law”) from the license obligation, subject to registration in the foreign Broker-Dealers Registry.

Also, the Securities Law impose a prohibition on offering securities trading services through a securities trading system that is not managed by a stock exchange licensed in Israel (and therefore applies to brokerage services for the purchase of securities on stock exchanges outside of Israel) by determining a permit regime for entities seeking to engage in the aforesaid activities. Following this amendment, the ISA published the conditions for receiving a general permit for foreign stock exchanges and for other
entities, including Israeli Banking Corporations.

Regarding custody services, there are recommendations of an inter-ministerial committee for “Custodian Services in the Israeli Capital Market” that were published on 2011 and were adopted by the BOI in 2013. The main purpose of these recommendations is the protection of client assets, inter alia, in cases of insolvency of the custody agent.

At the beginning of 2022, the government published a draft bill which imposes a license requirement on the provision of payments services.

Israeli companies play significant role in fintech, and Israeli regulators acknowledge the importance of Fintech and innovation for the banking and finance industry.

Being a fintech supporter, the Israeli Government adopted a resolution in January 2018 regarding the establishment of an experimental environment for fintech companies. In accordance with the resolution an inter-ministerial team was established for the examination of a regulatory adjusted environment for
fintech companies with respect to the rendering of various financial services, e.g. credit extension, payments, settlement, discretionary investments, banking (banktech) and insurance (insurtech).

Following the work of the inter-ministerial team, the government submitted a bill to encourage the development of financial technology in Israel (the “Bill”). The Bill intents to establish a regulatory sandbox, which will enable fintechs to explore their business model and products in the Israeli ecosystem. In accordance with the Bill, a designated committee will operate programs to encourage financial technology. Each program will take 2 – 4 years, and operate under one of the following program types:

• Licensing Program Type – designated for fintechs which business is subject to a licensing requirement. Under this program type, the fintech may be granted with regulatory leniencies for a limited time.
• Accompanying Program Type – designated for fintechs which business is not subject to a licensing requirement but experience regulatory difficulties.

A regulatory authority will monitor each fintech which participate in a program. In addition, such fintech may be subject to designated AML rules, to address the difficulties such fintech experience with banks.

In a recent Fintech Report (January 2023), the ISA stated that the Ministry of Justice, jointly with other governmental partners, including the ISA, are still working to promote the Bill.

In addition, for the last few years the Israel Innovation Authority and the ISA operate the Pilots Program. The Pilots Program aims to support Fintechs which have a potential to promote competition in the financial market.

Adopting the notion that Fintech brings competition to the financial sector, we note that the BOI had granted a bank permit to new digital banks (One-Zero Bank) which is anticipated to go officially commercial beginning 2022, and The Head of The Capital Markets, Insurance and Savings Authority granted a permit to a digital insurance company.

Israeli lawmakers and regulators have not yet fully-expressed their approach towards issuance of cryptocurrencies. In 2019, a committee appointed by the Israel Securities Authority for the examination of regulation regarding public offering of decentralized cryptocurrencies coins/tokens published its final
report. The report generally classifies cryptographic assets to 3 types: (a) currency assets (i.e., payment); (b) investment or security assets (i.e., assets which are issued for the purpose of granting ownership, partnership or membership in a certain venture, or the right for future cash-flow from such venture); and (c) utility assets (i.e. assets which are issued for the purpose of granting rights for access or use of a service or product offered by a certain venture).

The report stipulates that pure currency assets, not designated to be used for a certain venture, shall usually not be considered as a security for the purpose of The Israeli Securities Law. However, security assets shall be considered as securities under The Israeli Securities Law, and utility assets should be
scrutinized in light of their specific features.

Moving forward, the report recommends to further consider the following:

• Designated disclosure requirements for cryptographic assets,
• Issuance of cryptographic assets in the frame of a regulatory sandbox,
• Establishing regulations re crypto-security assets trading platforms.

In a recent pre-ruling, the ISA rejected the position of a company that it’s to-be-issued tokens should be regarded as utility tokens and therefore not be subject to the Securities Law. It seems that the ISA’s approach narrows the types of tokens which may be classified as utilities.

Recently (January 2023), the ISA published for public review and comment a proposal for the amendment of the Securities Law, the Investment Advice Law and the Joint Investment in Trust Law. According to the proposal, Digital Assets will mean “Digital representation of a value or right, which is used for financial investment purpose, and are transferable and electronically stored by Distributed Ledger Technology or other technology”. Additional change will be made to the definition of Securities, to clarify their purpose as financial investment. With respect to Digital Assets which are Securities, the ISA will be empowered to provide exemptions from, or additional instructions to the existing provisions of the laws.

Custody or transfer services of cryptocurrencies is regulated under the Supervision of Financial Services (Regulated Financial Services) Law, 2016 (the “Financial Services Law” or “RFSL”) which explicitly include “Virtual Currency” as a Financial Asset, and generally imposes license requirement on a business of exchange, sale, transmission, management, and custody of such Financial Asset.

The license requirement under the Financial Services Law does not apply to certain Israeli-licensed entities (e.g., banks, Banking Corporations, insurers etc.). In addition, certain exemptions from the license requirement are available under regulations. The Financial Services Law imposes various requirements on a licensee under that law, including upcoming AML/CFT requirements set forth in regulations (a draft of AML regulations was already published).

Kindly refer to Question 8 for additional information.

As explained under question 24 below, currently there is no deposit insurance mechanism under Israeli regulation. The regulation applicable to custody of cryptocurrency does not impose explicit requirement to insure the cryptocurrency held for clients or regarding segregation of funds, although the Financial Services Law authorizes the regulator to issue regulations in relation to such aspects. Such aspects are also mentioned in the licensing procedure issued by the regulator and therefore may be reviewed by the regulator during the licensing process. In addition, in case the cryptocurrency is held in trust, then under Israeli general trust law the trustee is required to hold them in segregation from other assets in a manner that will allow to distinguish between such assets. With respect to crypto assets that are deemed as
securities, their custody would be subject to segregation requirements applicable to Israeli custodians of securities.

According to the Financial Services Law, in order to hold crypto assets (i.e., virtual currencies) one should hold an applicable license for the provision of Financial Asset Services (“FSP License”). Financial Service Providers (“FSPs”) as such are regulated and supervised by the CMISA.

The RFSL intends to regulate various Financial Services, inter alia, Financial Asset Services. Under the RFSL, “Financial Asset Services” are defined as “any of the following activities, as a business, which does not include extension of credit: (a) an exchange of a Financial Asset with another Financial Asset, including redemption, change, conversion, sale or transfer of a Financial Asset; (b) management or custody of a Financial Asset, including by a safe box”. Financial Assets includes, among other things, the following: cash, cheques, monetary deposits, and virtual currencies.

The RFSL imposes ongoing duties and obligations on licensed FSPs. In addition, licensed FSPs are subject to AML/CFT requirements. The RFSL includes however several exemptions from the FSP License requirement, which are mainly relevant to certain Israeli licensed entities. In addition, several exemptions are granted by the Supervision of Financial Services Regulations (Regulated Financial Services) (Exemption from Licensing), 2022.

According to the RFSL, one type of the FSP License is a Basic License, which allows its holders to provide financial services on a small scale (currently, up to ILS 30M which is roughly $ 8.8M). The second type is an Extended License, which allows its holders to provide more services on a significant scale (currently, over ILS 30M). One of the conditions for obtaining a Basic License is minimum capital of ILS 300,000 which is roughly $88,000. Other conditions are that the applicant is an Israeli citizen, or a corporation incorporated in Israel that at least one of its officers is an Israeli citizen; lack of criminal record; an approval of the controlling entity/person; compliance by the officers of the corporation with pre-conditions set forth in the RFSL.

The conditions for obtaining an Extended License (in addition to all the conditions set forth above) are minimum capital of ILS 1M which is roughly $ 290,000; the applicant being a corporation incorporated in Israel; the organization structure of the corporations complies with the conditions set forth under the RFSL; the applicant needs to provide a business plan, the information regarding financial resources and funding as well as public interest considerations. The CMISA will conduct examination of integrity of the applicant, including examination of the suitability of the officers, controlling shareholders and stakeholders.

The Governor, together with the Licensing Committee, has the authority to grant a banking license.

In recent years, the BOI’s policy is to simplify the process of establishing a bank, including supporting the establishment of digital banks and creating regulatory certainty in the early stages of the licensing process for anyone interested in establishing a bank, and to encourage new applicants by promoting a speedier and less costly licensing process.

According to the process introduced by the BOI, an applicant may obtain a limited bank license within approximately six months of submitting a request to the BOI. This limited license will permit the bank to begin providing limited deposit and credit services. At the completion of all five steps of the licensing process, as detailed below, an applicant may obtain a permanent bank license.

The five-step licensing process includes the following steps:

1. Submitting to the BOI a proposal for establishing a bank.
2. Introductory meeting with the BOI followed by a preliminary application for a limited bank license and a permit to control a banking corporation.
3. Holding a dialogue with the BOI while developing the business plan. At the end of this step, the applicant will receive from the BOI a preliminary approval to submit a formal application.
4. Filing a formal application for a limited license and a permit to control a banking corporation, together with a milestone plan and schedule in order to complete all necessary requirements for the permanent license. The application will be reviewed by the BOI, and subject to its approval,
   the applicant will receive a limited bank license and a milestone plan including a schedule for receiving a permanent license.
5. Upon receipt of the limited license, the applicant will be granted with a period of time to complete all necessary requirements (e.g. raising capital, infrastructure investment, hiring employees etc.), in order to obtain a permanent license within the schedule set by the BOI.

In analyzing the possibility of non-Israeli banks, which are not licensed as banks by the BOI (“Non-Israeli Banks”), to engage in cross border activity in Israel, it is worthwhile to consider each type of activity separately, since different activities are subject in Israel to separate regulations with separate regulators.

Banking Services – As for traditional banking services, such as bank accounts, deposits and credit/loans, Non-Israeli Banks, which are not licensed by the BOI, as mentioned above, cannot engage in these banking activities in Israel (namely, in simultaneous acceptance of deposits and extension of loans). When acting on cross border basis, Non-Israeli Banks can offer to provide such services from outside of Israel either:

1. Through remote communications from abroad, or by allowing employees to travel into Israel and refer potential clients to the Non-Israeli Bank abroad; or
2. By establishing a representative office in Israel (either as an office of the foreign entity or through incorporation of an Israeli subsidiary).

Both types of activities do not require a license from the BOI if they are limited in Israel to provision of information about such services or performing certain activity related to accounts (such as transferring documents or assisting in KYC).

Establishing a representative office in Israel generally does not require licensing from the BOI. However, under The Banking Ordinance, no person or entity other than a licensed bank shall use the word “bank” or any of its derivatives in the name under which it is carrying on business, without the consent of the Governor. Thus, the BOI uses this authority when considering whether to allow Non-Israeli Banks to open local representative office in Israel and to use the word “Bank” while carrying on business in Israel. Generally, a Non-Israeli Bank, which obtained such consent from the BOI, is permitted to solicit clients in Israel in order to open accounts outside of Israel, and to provide information about banking services. It is not allowed, among other things, to engage in activities allowed only to Banking Corporation in Israel. The BOI issued a general permit allowing the use of the word “Bank” in the name of a representative office in Israel of a Non-Israeli Bank incorporated and licensed in a country that is a member of the OECD organization. The general permit is subject to certain conditions.

Loans/Credit and Services in Financial Assets – such services are regulated by the CMISA pursuant to The Financial Services Law. According to regulations promulgated under this law, the license requirement shall not apply, among other things, in case of a foreign entity incorporated in a foreign country which is an OECD member and is holding a banking license obtained from a supervisory entity in an OECD country, and is subject to AML regulations in such country, provided that such entity is not subject to a license requirement under the Israeli Banking Law. Under those regulations additional exemptions are available including based on the minimum loan amount etc.

In addition, according to an opinion published by CMISA, cross border activity will not trigger the licensing requirement if all of the following conditions are met: (1) The credit and engagement documents between the lender and the borrower (excluding security interests) are drafted in a language other than Hebrew, signed outside of Israel, and subject to non-Israeli law; (2) The borrower’s accounts in which the credit is extended are maintained in financial institutions outside of Israel (3) The lender does not contact new clients in Israel, including by way of marketing, advertising or onboarding by any means whatsoever; and (4) The lender does not meet its clients in Israel.

Advisory and Portfolio Management (discretionary) Services – Such services are regulated by the ISA pursuant to The Investment Advice Law. In general, provision of such services in Israel, requires a license unless any of the exemptions provided under The Investment Advice Law apply (such as when engaging only certain eligible clients as defined under the law). In addition, this law prohibits the offering of such services in Israel if they are to be provided without a license from the ISA (when none of the available exemptions applies). However, a foreign entity engage in such services under foreign law may be registered with ISA as a “Foreign Dealer” and furnish such services in Israel under certain conditions (including, inter alia, a cooperation agreement with an Israeli licensed entity).

In light of the above, the ISA published its position stating that the Investment Advice Law applies even when part of the service is provided in Israel. According to the position, if all the following conditions are met, the Investment Advice Law will not apply to a foreign entity rendering such services to an Israeli person: (1) The business relationship was established outside of Israel or was initiated by the client residing in Israel, and the service provider did not solicit the client in Israel; (2) The account is managed outside of Israel; and (3) Meetings are not held in Israel. In addition, the ISA published several pre-rulings regarding specific circumstances.

Brokerage Services – as mentioned above, the ISA published the conditions for receiving a general permit for foreign securities exchanges and for other entities providing brokerage services through foreign securities exchanges. Basically, the general permit may allow a non-Israeli entity to provide such
brokerage services only to certain qualified investors. Providing such brokerage services to any other investors, may be permitted to a non-Israeli entity (which would apply for such permit), if it is subject to supervision and regulation as a broker-dealer in the United States; if it is subject to supervision and regulation as an investment firm or a credit institution allowed to provide investment services under the EU MiFID Directive; if it is an investment firm or a credit institution as defined under UK regulation whose head office is located in the UK and is allowed under the Financial Services and Markets Act 2000 to perform investment services and activities in the UK; or if it is a licensed bank in Switzerland authorized as securities dealer under Swiss law.

Payment services – The provisions of the Israeli Payment Services Law regulate the relationship between a Payment Services provider and its clients. The law came into effect in October 2020. This law does not set out licensing obligation (for which there is a separate draft legislation being promoted) but mainly consumer protection provisions. This law also applies to a foreign payment services provider, when it provides payment services to a client (individual or corporation) who is an Israeli resident, if such service provider directs its activity towards clients in Israel. According to the law a service provider will be considered as directing its services to clients in Israel, taking into account the overall circumstances of the matter, inter alia, if it enabled the client to provide it with an address in Israel as part of the agreement, or if it addressed the client in Hebrew, or if it offered his services to the client in Israeli currency. Recently a new draft bill was published, which intends to impose licensing requirement on payment services providers and payments initiators and regulate the supervision of such service providers.

Under The Banking Law, the BOI is authorized to grant various bank licenses to Israeli corporations except for foreign bank licenses which can be granted to a corporation incorporated outside of Israel, acting as a bank in its origin location. Currently, Israeli banks are organized as limited liability companies. In theory, a bank may take the forms of other types of corporations such as a cooperative society. When a Non-Israeli Bank obtains a foreign bank license from the BOI, it is not required to incorporate a legal entity in Israel. Typically, the license is granted to the foreign bank entity, and allows it to open a branch in Israel.

The BOI issued “Proper Management of Banking” directives/Rules (“PMB”) which impose corporate governance and organizational requirements on banks.

PMB 301 deals with the board of directors and, among others, addresses the following matters: functions of the Board of Directors and its powers; issues that the board must consider and decide on; supervisory
and monitoring role; board committees; frequency of board meetings including presence requirements for board members; certain meetings without the management of the bank; chairman of the board; practices for effective functioning of the board; reports to the BOI etc. As to the composition of the board, the directive sets out, among others: limitation on the minimum and maximum number of members, eligibility to serve as a director and conflict of interests, at least third of directors should be independent (external directors); at least third of directors should have “banking experience”, at least a fifth of directors should have “accounting and financial expertise”, at least half of directors should have general professional qualification, and at least one director will have proven knowledge and experience in information technology.

Other PMBs address different organs and functions in the bank such as the chief accountant, the external auditor, the internal auditor function, the compliance functions, the risk management, the ombudsman etc.

Israel has an extensive legislation regarding remuneration policy and restrictions on remuneration of senior officers, with respect to financial and banking corporations.

According to the Israeli Companies law, 1999 (the “Companies Law”), banking corporations, which are publicly traded companies, are required to adopt a remuneration policy for their senior officers. The remuneration policy needs to take into account certain considerations as stipulated in the Companies
Law, inter alia, regarding the company’s objectives; the company’s long-term strategy; the company’s risk management policy; the company’s size and nature of operation, etc. In addition, the remuneration policy needs to include references to certain matters and guidelines with respect to variable terms of
employment (cash and equity), retirement grants, the relationship between the senior officer’s remuneration and the remuneration of other company’s employees, etc. The Companies Law stipulates that the board of directors shall approve the remuneration policy following the recommendation of the
remuneration committee and afterwards the approval of the shareholders by a special majority (50% of the shareholders who are not the controlling shareholders and who have no personal interest). Under special circumstances, the remuneration committee and the board of directors may approve the remuneration policy despite the objection of the company’s shareholders. The Companies Law also sets provisions regarding the approval of remuneration for senior officers.

The Remuneration of Officeholders in Financial Corporations (Special approval and inadmissibility of expense for tax purposes in respect of irregular remuneration) Law, 2016 (the “Remuneration Law”), includes extensive restrictions regarding remuneration on Banking Corporation. The Remuneration Law applies to “Financial Corporations” which include various financial institutions such as banking corporation and in certain circumstances their controlling corporations but excludes foreign banks and other foreign financial bodies. According to the Remuneration Law, remuneration to senior officers or employees of a Financial Corporation paid to them in connection with their employment both by the Financial Corporation and by its affiliates, for which the projected expense calculated as of the date of the approval of the remuneration in accordance with GAAP, is expected to exceed NIS 2.5 million per year, may not be approved unless the ratio between (i) such expected expense (on a full time basis), and (ii) the expense for the lowest remuneration paid (on a full time basis) by the Financial Corporation to its employee, directly or indirectly (including to a person employed by a manpower contractor or a services contractor), during the year prior to the approval (the “Employee Ratio”), is lower than 35. This is an absolute cap on the remuneration (with no exemption).

Subject to compliance with the Employee Ratio, the approval of remuneration to senior officers or employees of a Financial Corporation, exceeding NIS 2.5 million per year, shall require a strict approval mechanism. Engagement with respect to Remuneration, which was not approved in accordance with the Remuneration Law, shall not be valid for both the Financial Corporation and the senior officer or employee. In addition, according to the Remuneration law, in general, any expense regarding the remuneration of employee of a Financial Corporation exceeding the sum of NIS 2.5 million per year shall not recognized as remuneration expanses for tax purposes.

PMB 301A, issued by BOI, applies to banking corporations and to their subsidiaries. The 301A Directive is based mainly on the FSF/FSB documents, on the “Principals for Sound Compensation Practices and Implementation Standards, Basel Committee recommendation (January 2010), Compensation Principles and Standards Assessment Methodology” and the European Directive 2013/36/EU. According to the 301A Directive, the banking corporation’s board of directors is required to determine, at least once every three years, a remuneration policy for all its employees, as well as principles for the remuneration policy in its subsidiaries. The remuneration policy shall apply to all employees, focusing on key employees. The 301A Directive also sets restrictions, mainly regarding the remuneration for key employees. Such restrictions include, among others, that the maximum variable remuneration shall not exceed 100% of the fixed remuneration (subject to extraordinary circumstances); claw back provisions; deferral arrangements attributed to a key employee granted for a calendar year; restrictions regarding payment of variable component for directors etc.

On May 2013, the BOI issued a series of guidelines under the PMB Rules, to be used to implement the global regulatory framework for more resilient banks and banking systems issued by the Basel Committee on Banking Supervision in the Basel III framework. The implementation of the Basel III Rules in Israel was principally defined in PMB 202 which adopts the Basel III Rules in Israel and sets forth the necessary adjustments to the then-existing PMB Rules, which dealt with capital requirements and calculations for Israeli banking institutions, as well as the introduction of additional new rules such as the requirements for liquidity coverage ratios (dealt with in greater detail below).

The regulatory capital requirements set forth by the BOI in the PMB Rules are based on four underlying principles:

1. The banking institution should have a proper process in place which will enable the estimation of its general capital adequacy in relation to its risk profile as well as a strategy to maintain its capital levels.
2. The Supervisor of Banks shall review and estimate the internal capital adequacy and strategy of the banking institutions as well as their ability to monitor the regulatory required capital ratios to ensure compliance therewith. The Supervisor of Banks shall apply its supervisory authorities and powers where it shall not feel comfortable with the findings of such review.
3. The Supervisor of Banks expects the banking institutions to be in a situation in which their capital levels shall be above the minimal regulatory requirements and it will be able to require that Banking Corporations maintain higher capital levels than those minimally required according to
   the PMB Rules.
4. The Supervisor of Banks shall interfere, in early stages, in order to prevent a decrease in the capital levels below the minimum, requirements which are applicable in connection with the risk profile of a specific Banking Corporation and
5. it will require remedial actions where the capital levels are not maintained, or their previous levels are not recovered.

The PMB Rules set forth very elaborate and detailed guidelines and instructions as to the processes and procedures which should be implemented by the banking institutions in order to assess and maintain their
capital requirements.

The PMB Rules in connection with the Basel III minimal capital requirements generally apply to banking institutions in Israel (other than foreign banks) and to credit card companies. The capital requirements differentiate between the total regulatory capital requirements and the Tier 1 capital requirements for
banking institutions of which the balance sheets comprise 24% or more of the total balance sheet assets of banking institutions in Israel (currently the two largest banks in Israel; pursuant to a temporary guideline issued in light of the Covid-19 outbreak (the “Covid-19 Guideline”), such are required to maintain 12.5% and 9% ratios, respectively), and those whose balance sheets are smaller (which, pursuant to the said Covid-19 Guideline are currently required to maintain 11.5% and 8% ratios, respectively). The Supervisor of Banks is authorized to set forth higher minimal ratios for specific banks.

The BOI PMB 218 implements the requirements from banking institutions to calculate their leverage ratio, namely the ratio between their Tier 1 capital and their exposure levels. Generally, following the implementation of the Basel III Rules Israel transferred from a policy of reviewing the total capital adequacy to a policy of being focused more on the Tier 1 capital.

The exposure levels will generally be calculated in accordance with the accounting principles, with certain exceptions (primarily: (a) certain adjustments to the calculations of balance sheet exposures and nonderivative items; and (b) the prohibition on setting off loans and deposits). Furthermore, PMB218 includes elaborate instructions and guidelines as to the methods of calculating the leverage ratio, the items which are to be included as well as the items which may, or should, be set-off or disregard when making the
calculations.

As of this date, the minimum leverage ratio of banking institutions in Israel whose balance sheets comprise 24% or more of the total balance sheet assets of banking institutions in Israel (currently the two largest banks in Israel) are (pursuant to the temporary Covid-19 Guideline) 5.5% and for all other banking institutions – 4.5%.

The BOI Proper Banking Conduct Rule 221 implements liquidity requirements from banking institutions. PMB 221 generally adopts the Basel III Rules in connection with the liquidity coverage ratio (LCR) while setting minimum liquidity requirements for Israeli banking institutions and authorizing the Supervisor of Banks to set forth higher requirements with respect to specific banking institutions if it finds that the current liquidity requirements are insufficient in connection with the liquidity risks faced by such certain
banking institutions. The liquidity requirements apply to all banking institutions with a certain differentiation between banks on a stand-alone basis and banks which are a part of a jointly controlled banking group. PMB 221 elaborates on the details and methods of calculation of the LCR.

Under PMB 221, the LCR minimal requirement for Israeli banking institutions became effective on April 1, 2015, when it was set at 60%. The LCR minimal requirement increased to 80% on January 1, 2016, and to100% on January 1, 2017, the level it is in as of this date.

In general, the financial reports of banking corporations and credit cards companies owned by them in Israel, are in accordance with the accepted accounting principles (Israeli GAAP), and in accordance with the Supervisor Reporting to the Public Directives, which requires them to publish annual and quarterly financial reports. With concern to most topics, these Directives are based on accepted accounting principles of U.S. banks, while other less significant topics are based on international financial reporting standards (IFRS) and on Israeli GAAP. Public companies in Israel are required to publish reports in accordance with The Securities Law and regulations promulgated thereunder, which are regulated by the ISA. While banking corporation, which are public companies, publish their annual and quarterly reports under the Reporting to the Public Directives issued by the Supervisor as mentioned above, they are still subject to certain regulations according to The Securities Law, including publishing immediate reports regarding any material event or event that could significantly affect the price the Company’s securities.

The BOI recognizes the need to consider banking group consideration, for purposes of stability, risk management and exposure. Therefore, in several PMB’s issued by the BOI, it is stipulated that the banking corporation’s board of directors will consider in its policy and strategy the banking corporation’s group structure, and the ability to control and manage risks in the group. Similarly, the risk management policy of the banking corporation should take into account its subsidiaries and the board of directors shall determine general instructions for corporate governance and control in the Banking Corporations’ subsidiaries including subsidiaries and branches outside of Israel.

For that purpose, the board of directors of a banking corporation is required to create a supervision mechanism, which will ensure fluent transfer of information and ensure that the banking corporation internal auditor shall receive all required information, on his discretion, which will allow him to conduct examinations and other procedures in other corporations in the group. In addition, the banking corporation’s audit committee is required to refer to the suitable scope of internal audit in the banking corporations’ subsidiaries and to recommend it to the board of directors.

Permit requirement for acquisition of shareholdings or control

The Banking Law imposes certain restrictions on holdings in banks (and bank holding corporations) beyond certain thresholds. Holding of any type of shares (or any other means of control such as the right to nominate directors) above 5% requires a permit from the Governor of the BOI (in advance). In addition, a
person cannot coordinate its voting for the nomination of a director in a bank with another person without a permit.

The Banking Law also sets out that no person shall control a bank unless it obtains a permit from the Governor of the BOI.

Reporting Requirements on Holdings in a Banking Corporation

A shareholder holding more than 5% of the shares (or any type of the means of control) in a bank must report its holdings to the bank. Such report shall include, among other things, the person for whom such holder acts as agent or trustee, and in case the holder is a corporation – its controlling shareholders and anyone holding more than 5% in such corporation. The report shall be delivered annually (on April 1) and on any other dates determined by the BOI. In case of a bank without a controlling stake (i.e., no shareholder in the bank needs a permit for control from the BOI) the reporting threshold is 1% (instead
of 5%) and the report is required each time this threshold is crossed.

In case the bank is also a public company (its shares were offered to the public), additional reporting obligations to the bank apply pursuant to the Israeli Securities Law and regulations

Under the Banking Law in considering whether to grant a person with a permit holding or a permit control in a bank, the BOI has to take into account, among other things, the adequacy of the applicant to control or to hold the amount of shares requested, its business experience, its occupation and other business, its financial strength and integrity, the consequences of the permit on the current or future control over the bank; the plans of the applicant; the policy; public interests etc.

The BOI published a policy regarding the criteria for granting control permit in a bank. We note that not all control permits (most of which were issued before the policy) comply with the criteria and in addition the BOI may deviate from the criteria. According to the policy, in addition to the above, considerations BOI shall also consider: the applicants personal and business integrity; investment strategy; potential conflict of interest with the bank. The policy addresses the requirement for a stable and permanent controlling core in the bank. The policy also sets out restrictions on how the means of control in the bank are held. The financial strength of the applicant will be checked with respect to different parameters. The main criteria are the ratio between the equity of the ultimate controlling shareholder (assets minus liabilities) and the value of the controlling stake which should be at least 150% (or 250% for small banks). Each controlling shareholder will be required to have additional equity of 100% from the means of control it purchases beyond the controlling stake.

There are no explicit restrictions under Israeli law on foreign shareholdings in banks. In the past, certain foreign shareholders (foreign banks and foreign individuals) received permits from the BOI to hold control in banks in Israel. The abovementioned policy, which was published by the BOI regarding the criteria for granting control permit in a bank, addresses the possibility of foreign shareholders to obtain a permit to control a bank. Following a decision of the Israeli ministerial committee for national security affairs, an advisory committee was established in order to provide regulators, which have discretion to approve foreign investments in Israel, with national security aspects of such foreign investments. Recently the Israeli ministerial committee for national security affairs updated and tightened the internal process of evaluating foreign investments.

There is no special regulatory regime for domestic systemically important banks, although certain banking regulation are applied differently on large Israeli banks.

The sanctions the regulator can order in the case of violation of banking law provisions include criminal investigation (although BOI does not have criminal investigation powers itself but rather depends in the police and the Ministry of Justice), fines and other monetary sanctions, and in certain situation the ability
to appoint a trustee for one’s holdings in a banking corporation.

The sanction the regulator can order in case of a breach of PMB Rules include administrative sanctions and the ability to force banks to include provisions in their books.

BOI has also the power to ask in an extraordinary situation the termination of an officer or a director in a bank.

Other relevant regulators like the ISA may inflict criminal and administrative sanction for corporations and
individuals.

Unlike other jurisdictions, the Israeli financial sector was less vulnerable to the 2008’s global financial crisis and therefore the Israeli government was not required to bail-in any of the banks.

In terms of resolution of a bank, The Banking Ordinance and the Bank of Israel Law provide the BOI with various powers and tools. For example, in case the BOI believes that a bank has acted in a manner that might impair its ability to fulfill its obligations or its proper conduct, it may issue order to take certain measures, instruct the bank to avoid any type of activity, ban distribution of a dividend and limit the authority of a board member or an officer or remove him from office. In case a bank is not able to fulfill any of its obligations or return any assets that were deposited with it, the BOI may in certain circumstances, appoint an authorized manager for the bank or to supervise its management.

In considering the stability of a bank, the BOI may provide it with funds by discounting bills of exchange, promissory note or by collateralized loans. Moreover, the BOI may, with the approval of The Government of Israel, announce that the BOI or another bank shall guarantee another bank’s deposits (up to the full amount or up to a certain amount). Such guarantee may cover also other liabilities if it is for the benefit of the public.

In general, there is no specific legislation in Israel that regulates the status of clients’ assets in the event of an insolvency.

In addition to the BOI authority to guarantee certain deposits or liabilities as mentioned under question 24 above, we note that in recent years the BOI is considering the advantages and disadvantages of a deposit insurance mechanism and the need and possibility of implementing it in Israel.

As for securities held by clients, there are certain laws and directives, including the rules and bylaws of Tel Aviv Stock Exchange (TASE) and of the Tel Aviv Stock Exchange Clearing House, which mainly address the issue of custody services which guarantee certain separation between assets of the clients and assets of the bank.

Since under the Bylaws a TASE member viewed as holding securities for its client in trust, then under the concept of Israeli Trust Laws, it seems that those securities are not considered as part of the assets of the TASE member i.e. the bank.

In addition, as part of a recent amendment to The Securities Law, several rules applying to TASE members were added, aiming to increase the stability of clearing houses and therefore, to protect clients’ assets. As to custody services recommendations that were adopted by BOI, please see answer to question 4.

Under PMB published by the BOI, certain “contingent convertible” capital instruments issued by a bank may be included in its tier 1 and tier 2 capital if they meet certain conditions. Among others, under the terms of such instruments in case of a trigger event for non-viability such instruments will be converted to equity or will be written off.

Under the PMB there are certain rules and requirements in connection with the calculation of Tier 2 capital, namely gone-concern capital. Such rules, among others, include guidelines as to which items may be included in Tier 2 capital, how are they to be calculated, which items may be set-off, and so on. It
should further be noted that following the implementation of the Basel III Rules, Israeli Banking Corporations issue fewer capital notes which form Tier 2 capital. In addition, Israeli Banking Corporations have recently begun issuing contingent convertible (CoCo) bonds. Such bonds are deemed Tier 1 capital
for regulatory purposes since their terms enable a compulsory conversion to equity in certain circumstances or the termination of the interest obligations and the deferral of the principal repayment.

The recent trends in banking regulation in Israel include the ongoing implementation of reforms like the “Shtrum Reform” which had separated between the two leading Israeli banks and their controlled credit card companies. The reform had changed the credit card and payments industry in Israel. The two leading banks sold their credit card owned companies and began to issue new credit cards through other companies and executed new credit card issuance agreements with the other credit card companies. Under recent regulation issued by the Minister of Finance on January 2023 the control stake of a third credit card company CAL will be sold in the next coming years by its owner, Israel Discount Bank. In a new trend beginning last year, Israeli institutional Investors, who hold some of the biggest insurance groups in Israel, propose to purchase the control in two credit card companies.

The Israeli banks have already invested resources in their new payments applications, which may change Israeli payments system, including as possible competition to the credit card industry, while leading foreign players might be also involved in the developing Israeli payments industry. We shall face a new
legislation which will regulate the payments industry in Israel which may lead to more competition in the banking sector, the adoption of new fintech technologies and the competition from new fintech companies.

The prosperity in the real estate market resulted in the increase of the of the mortgages exposure in the Israeli banks assets which may resulted in more regulation by BOI with regard to this sector.

We think the biggest threat (and opportunity) is the advance of technology in the financial sector, which is enabled by the growth of the Fintech industry in the world and in Israel. The banks face a competition not only from the traditional financial sector players, but also from new virtual banks licensed by BOI recently, new (and less regulated) technology companies (both international and local), with respect to services like money transferring, payments, credit cards and investment management.

Banks in Israel hold historic financial power because of their daily personal relationship with clients, including retail clients, and the comprehensive information they have about their clients. Since efficiency plans require the banks to close branches and release employees, and because of the legislation of a new “Open Banking” law in Israel, this competitive advantage may be lost over time. The Israeli banks are more exposed to the Israeli real estate sector than in the past because of the prosperity of this sector during the last decade which was increased during the Covid19 period, and which is under certain new challenges because of the increase of the interest rates.