Bank of Israel Issues New Draft Directive to Ease Regulatory Requirements for Small and New Banks

The Banking Supervision Department has published for public comment a draft Proper Conduct of Banking Business Directive titled “Supervisory Framework for Small and New Banks.” The purpose of the draft directive is to adapt regulatory and supervisory requirements to the size and complexity of small and new banking corporations’ operations, in accordance with the Basel Committee’s principle of proportionality, while maintaining banking system stability and protecting customers.

The adjustments proposed for small and new banks provide significant relief, including in capital and leverage ratios, liquidity requirements and their calculation, limits on sectoral and borrower concentration, board size and composition, consolidation of functions within the bank’s organizational structure and the outsourcing of certain functions, risk management tools, and the possibility of implementing a flexible business model suitable for small banks and digital banks.

The publication of the draft directive marks another stage in the implementation of the recommendations of the interministerial team tasked with  examining measures to increase competition in the retail banking system, which were published in August 2025. The Knesset is currently discussing the legislative amendments required to implement the team’s recommendations under the Arrangements Law, and the draft directive constitutes a complementary measure to the legislation.

The draft is intended to replace Proper Conduct of Banking Business Directive 480, “Adjustments to Proper Conduct of Banking Business Directives Applicable to a New Banking Corporation and to a Banking Corporation under Formation” (2020).” It will also apply to existing small banks that have already received licenses, such as One Zero and Esh Bank.

Highlights of the Draft Directive – What Is Changing?

• Division into supervisory tiers by asset volume: The draft directive establishes supervisory tiers according to the banking corporation’s asset volume, with regulation tailored to each tier in line with the bank’s size and systemic importance:
  • Tier 1 – very small banks (total assets of up to ILS 15 billion)
  • Tier 2 – medium-sized banks (total assets of ILS 15–50 billion)
  • Tier 3 – large banks subject to full banking regulation (total assets exceeding ILS 50 billion)

The draft allows for a transition period of up to two years to complete the necessary preparations when moving between tiers.   

• Preparatory stage for new banks: A new bank that has received a license will be assigned a preparatory stage of up to three years (for Tier 1 or Tier 2), with a possible extension of up to two additional years. During this preparatory stage, regulatory relief will apply in areas such as capital, liquidity, corporate governance, and operational requirements, to enable the gradual implementation of regulatory requirements.   

• Adjustments to regulatory requirements for small banks (including operational relief enabling a digital/lean model): The draft directive proposes a series of potentially significant adjustments and reliefs, especially for small, new, and digital banks. The adjustments span many diverse areas, including:
  • Capital and leverage – adjustments to capital adequacy targets and leverage ratios, including situations in which adequate compliance with high-quality capital (Tier 1 equity ratio) may exempt a bank from complying with a minimal total capital ratio.
  • Corporate governance – the minimum number of directors will be five instead of seven; relief regarding board composition in terms of banking experience and accounting and financial expertise; relief regarding the appointment of board committees and the required frequency of board meetings (quarterly instead of monthly); relief in the frequency of reporting to the board regarding the bank’s business position (once every six months instead of once every month and a half); and relief in the frequency of reporting by the internal auditor and ombudsman to the board (annually instead of biannually).
  • Consolidation of functions and outsourcing – the possibility to consolidate roles and outsource particular functions, to enable a lean organizational structure aligned with the scope of activity, for example in the fields of IT, cybersecurity, and risk management.
  • Exposure and concentration limits – adjustments to large/sectoral exposure limits, in recognition that a small bank in formation may be more concentrated, for example relief in the exposure limit to a group of borrowers or to a specific sector.
  • Bank-customer and service relations – adjustments enabling a more efficient service model for a small bank, without compromising principles of fairness, for example the possibility for a small bank to offer a more limited variety of payment methods or to seek an exemption from providing service through professional human responses at a telephone service center, subject to the banking corporation providing the customer with an appropriate alternative human response and obtaining the approval of the Supervisor of Banks.

The general tone of the draft is proportionality: easing regulatory requirements for small and new banks that are not critical to the stability of the banking system and the protection of customers, while maintaining supervision and regulatory requirements relating to material issues.

The draft directive also proposes obligating new banking corporations to maintain an exit plan for the first ten years after receiving a bank license. This contingency plan enables a banking corporation to terminate its activities – through sale, closure, or in any other manner – without harming the banking system or its customers. A new bank will activate its exit plan, for example, if its business model proves unfeasible or if it fails to raise the required capital.

We invite entities considering applying for a banking license under the proposed gradual licensing framework to consult with us to examine the implications of the updated regulation for their operating model and business plan.

Entities interested in submitting comments on the draft directive may do so through us until the February 22, 2026, deadline.  

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Adv. Efrat Cohen is a senior partner in the firm’s Regulation Department.