The Taiwan Banker

Facing inherent disadvantages, Israel faced many difficulties in developing its financial and banking sectors. Through a series of financial innovation reform policies, however, its central bank not only solidified the overall banking system, but also further accelerated domestic FinTech, turning the country into a FinTech powerhouse.Although Israel is far from Taiwan, we may be familiar with this resolute nation – its mysterious ancient culture, technology industry development, and military force as a small power. We can’t help but notice the similarity of its external conditions to Taiwan. In fact, apart from its outstanding scientific and technological achievements, a number of its economic and financial policies have formed the basis for its innovation environment. In the past, Israel had a similarly conservative financial environment, to the point that for the better part of a century, no new banks were formed.In recent years, though, the banking industry has developed differently. Karnit Flug, current Governor of the Bank of Israel (BOI), Israel’s central bank, and also Israel’s first female central bank governor, understands well that Israel, like many countries, is facing a general problem of competition within finance and from the technology industry. She emphasizes that “in order to make the Israeli banking industry more internationally competitive, we welcome the participation of any industry, particularly FinTech.” It is not difficult to see the government’s resolve to improve the financial environment from its past policies. For example, based on increasing banking operational risk, inter-bank mergers or closures have been encouraged, and the number of banks in Israel has declined from 63 in 1990 to the current 20. In terms of business types, there are 14 commercial banks, four foreign banks, and two other financial companies.Before 1992, Hapoalim Bank, Leumi Bank, Discount Bank, Mizrahi Bank, Union Bank, and Industrial Development Bank were all state-owned, but as the government has actively promoted the privatization of state-owned enterprises, Hapoalim Bank, Mizrahi Bank, UnionBank, Industrial Development Bank have become wholly private. The top five banks, represented by Hapoalim Bank, hold a monopoly position in the industry. Their combined assets account for 94.1% of total assets in the Israeli banking industry, while the two largest banks, Hapoalim Bank and Leumi Bank, make up over 60%. Furthermore, the banking system also includes three independent banks, represented by Union Bank of Israel, whose combined asset value makes up 4.7%, and five foreign banks, represented by Barclays PLC’s Israel branch, whose assets make up 1.2%.An IMF report pointed out that Israel’s banking system has been moving towards sound development, in a state of low competition, driven by many past policies. Therefore, even if the development of its banks has stabilized, its total capitalization, loan quality, and profitability, etc., are passable, its leverage ratio of 6.6% is better than that of most mature economies, and its deposit loan ratio is under 100%. Capital pressure is limited, but with excessive asset concentration, the market still has concerns about the competitiveness and operational efficiency of financial institutions.The central bank has encouraged cross-border transformation and accelerated FinTech developmentAlthough Israeli banks have had relatively conservative policies in the past, as the economic and financial situation has stabilized, it is believed that the banking industry has had the power to take on more risk, and pursue more innovation opportunities, and a series of financial policies have been adopted to give them more room to pursue “responsible innovations.” At the same time, in response to the trend of digitization, the BOI has set up special departments to promote digital transformation (such as the Technology and Innovation Division and Cyber Unit, etc.), encouraging different types of cooperation between banks and FinTech companies, guiding industry to establish FinTech development guidelines, and striking a balance between innovation and control, integrating the power of interdepartmental meetings and industry, and improving the operational efficiency and competitiveness of domestic banks.From the perspective of financial consumers, meanwhile, in order to help the public better understand and compare banks’ service costs, the BOI launched a bank identification card. People can check the financial assets, liabilities, deposit rates, and various fees of each bank online, and it is much easier than before to read their annual reports. Integrating the credit information of all domestic banks on a national platform can not only reduce the advantages of big banks, but also give credit opportunities to smaller ones, and help accounts flow between banks.In addition, at the end of 2016, the government passed a law requiring Hapoalim Bank and Leumi Bank (Israel’s two largest banks) to sell their credit businesses within three years. Many measures have also been put into place to help non-bankers to enter the market (such as P2P and microfinance). For example, banks must reduce their credit lines to cardholders by 50% between 2021 and 2024 in order to establish an environment in which financial institutions work together to promote market participation. In terms of lowering operating costs, the BOI also required banks to provide five-year streamlining plans, which are expected to reduce the number of branches by 20%, and the number of personnel by 10%. This policy reduced the number of bank branches by 1,076 within five years, investing the savings into FinTech.Cultivating financial literacy in the face of structural problems In order to create a more competitive financial environment, Israeli policies have opened up to encourage more market entrants. Although most employment licenses are only granted to domestic banks, there is no legal limit on foreign ownership of these financial institutions. The government’s willingness to attract foreign capital in recent years has become more apparent. A stable capital structure, business integrity, and an attitude of promoting competition in the Israeli markets is all that’s required to become a participant in the financial markets. More specifically, Israel’s financial regulators operate independently, ensuring that potential new players are not hindered by regulatory uncertainty. It is still not yet clear whether or not all of these reforms will heat up Israel’s markets.Many countries have paid attention to Israel’s innovation and development, but it is less known that like many countries, it also faces important structural challenges like high housing prices, a wealth disparity, low labor productivity, and a low labor participation rate for part of its population. However, the government has continued deep structural reforms, including expanding social housing supply, accelerating land privatization and urban renewal, and increasing affordability for young and low-income households. Clearly, Israel has been quite active in addressing economic and financial issues.Not only that, Israel’s government has been paying special attention to the importance of financial literacy, which has become a recent focus in Taiwan. In 2015, the World Bank conducted adult financial literacy interviews in 148 countries, finding that among all the countries surveyed, Israeli adults came in second only to Sweden, Norway, and Denmark (tied for first). Notably, in this survey, the gaps between Israeli respondents, including between genders and wealth levels, was small, even more so than in the latter three countries. Israel, lacking inherent advantages, understands well that only by mastering science and technology can it gain a foothold in the world. This spirit is not only manifested in its industrial policies, but also deeply rooted in its peoples’ education and culture.