Bank of Israel Encourages New Digital Banks

In June 2018, the Bank of Israel published a new policy for authorizing small and digital banks, replacing documents published in July 2013 and June 2016.

The Banking Supervisor announced that new banks can have initial regulatory capital of NIS 50 million – a substantial reduction of the levels previously required. This move was inspired by the recent relaxation of capital requirements in the UK by the PRA.

The Bank is seeking to standardize, shorten, and simplify the bank authorization timeline. It has published its authorization criteria in order to provide banking entrepreneurs regulatory certainty on expectations of the authorized entity and transparency on the necessary steps.

The Bank highlights an increased global emphasis on encouraging competition in the retail banking market and the removal of barriers to entry. These new digital developments will allow the provision of banking services in an efficient manner, including by outsourcing non-core activities, without a widespread branch network.

Risk-Adjusted Approach: All existing banking circulars and directives will apply to small startup banks on a risk-adjusted basis for the nature and extent of their banking activity.

Lower Capital Requirements: There is a requirement of NIS 50 million in regulatory capital for a bank’s first years of activity, until its credit book exceeds NIS 600 million, after which it will require 8.0% Tier 1 Capital and a total capital ratio of 11.5%.

Limited Authorization: Reminiscent of the “Mobilization Period” employed by the PRA in the UK, the Bank of Israel will grant new banks an authorization limited in both time and scope, increasing as the new bank expands its capital base, in a staged process lasting up to three years.

The Limited Authorization will give the new bank the regulatory certainty to complete its recruitment plans and infrastructure implementation with the knowledge that the regulatory permission is granted in principle. This staged process can be built into the regulatory business plan delivered as part of the application.

Outsourced IT Infrastructure: The Bank will allow a new bank to outsource its initial IT infrastructure to an existing regulated bank.

Deposit Protection: The Bank is in discussions with the Comptroller of the Finance Ministry to prepare a mechanism for protecting retail deposits placed with new banks.

Initial Meeting: A pre-submitted proposal is discussed, followed by a continuing dialogue until the application is ready.

Fast-Track Process: Once it receives a complete application, the Bank estimates the authorization process should take approximately six months.

Conclusion

We expect the new authorization process to generate interest from both domestic and foreign entities who wish to enter the Israeli banking market. The raising of the Standard & Poors credit rating for the State of Israel to AA- is evidence of the local economy’s strength, which should prove attractive to new entrants.