INTERNATIONAL - Israel is known for tech innovation, but its banks have a lot of catching up to do. So Hedva Ber, the supervisor of banks within Israel’s central bank, is cutting red tape and spurring competition.
That includes awarding the first new bank license since the 1970s, to a digital bank led by two tech entrepreneurs—Marius Nacht of cybersecurity company Check Point Software Technologies Ltd. and Amnon Shashua of Mobileye NV, which develops autonomous driving software.
Ber said the new branchless bank, which will offer credit and brokerage services, will “lead a change in the market.” With a Ph.D. in economics from Hebrew University, she has spent more than two decades learning about the financial sector from positions within the Bank of Israel and Bank Leumi, the country’s biggest lender by assets.
In an interview in Tel Aviv, Ber, 51, described the challenges of moving the industry away from its socialist roots while keeping risks under control.
IVAN LEVINGSTON: How did you get into bank regulation?
HEDVA BER: I started to work in the Bank of Israel at age 25. I fell in love with banking and bank regulation. And in the process of my career, all the different choices I made, I had in the back of my mind that I’d want to one day be the supervisor of banks, and 23 years later I received the position. Today I’ve been doing it for more than four years, and I can say it was the right dream. It’s a significant job—exciting, challenging, and I enjoy it.
IL: What specifically made it your dream job?
HB: The regulator has a very elevated influence on the banking system and via the banking system on the entire economy, on households, on who takes mortgages and who can’t get one and buy an apartment, on small businesses and big businesses, on economic growth, on financial stability. What’s exciting at the end is the people, that the regulation influences them.
IL: Why move between the private and the public sector?
HB: It gave me a lot of perspective, to see things from the side of Bank of Israel, the regulator, and also from the side of a bank. This gives me tools to do this job in a balanced way, with an understanding of which risks are big and mustn’t be implemented, and which risks are possible to handle.
IL: Israel’s known as “startup nation.” How do banks compare?
HB: The banking system in Israel is innovative. Startup nation is also fintech nation, and there were big and innovative changes in recent years—in the banking system, technology, and also in managing risk. The cybersecurity of the banking system is a leader in the world. We, the bank supervisor, actually have set as our central goal for the past few years to make the banking system more innovative and technologically advanced. We removed all restrictions on digital banking. We required that on every bank’s board of directors at least one director should have knowledge and experience in technology and innovation. The board should advise and push the bank to fit its business model to the changing world. We made it possible for the banking system to move to cloud technology, making it possible for more collaboration with fintechs. And we put out just recently, just about a month ago, a letter to the banking system that said we encourage them in implementing innovation and as regulators we are ready for risks to be realized. So again we essentially give them comfort to advance with innovation that has risks. But we make demands for how to manage the risks.
We recently permitted banks to open client accounts from afar with face recognition, without a banker on the other side. Just technology. Now more and more accounts are opened this way.
IL: Can the financial sector learn from the tech world?
HB: Banks fundamentally are more conservative, and it’s harder for them to change compared to startups. The win-win is when there’s cooperation between a bank with a culture of risk management, good processes, and understanding of risks and fintech companies that are faster, more flexible, and innovative. This cooperation allows each to benefit from the other’s world: Fintechs to test their products on the bank’s data and clients, to learn from the bank’s experience, and the bank can bring in the innovation and implement it. This speeds things up and provides the public with much more accessible, customized services and enables more competition. The technology lowers barriers for entry. That’s also a target that we gave ourselves, to raise the competition in the financial system in general and banks specifically.
IL: How do you modernize an industry with socialist roots?
HB: You have to think outside of the box. In Israel it’s known there are banks with labor unions, and the workers have tenure, and this framework is often inflexible and makes it difficult to become more efficient quickly. So about four years ago we told the banks that they need to become more efficient. But we said that we will permit the big expense of offering workers good voluntary retirement packages to be spread over a few years so that it doesn’t affect profits. And we gave them relief on capital requirements. So this triggered them to reduce manpower, rein in the labor unions, and to do this in a way that respects the workers. Thousands of workers chose to retire voluntarily with a good financial package. The banks reduced a non-negligible percentage of their workforce, about 12% of the bank system. The banks were able to adjust their organizational structure, hire technologists, and move from a worker-based structure to one based on technology.
IL: What was involved in preparing to give out Israel’s first new bank license in decades?
HB: We lowered capital requirements for a new bank in coordination with what is accepted globally, consulting with the IMF. The Bank of Israel built a credit database to make the information available to new players. We changed the entire licensing process: Today, I have a staff that works with each entrepreneur who wants to open a bank and guides them to understand the regulations and the requirements. We supported the creation of a bureau of computing services that permits many players—a new bank, credit organizations, small banks—to share IT infrastructure. This lowers the barrier of high technology costs. That’s not the only step we took to help the competition. Another step was the decision to separate the credit card companies from the banks.
IL: You took the words out of my mouth.
HB: The legislation requires the banks to sell their credit card companies. The thinking was to create new players to compete in specific niches of the banking system, in the areas of payments, home credit, small-business credit, and maybe others. Two credit card companies separated from the banks, and we are seeing them now building a business model and actually starting to compete in some of these areas.
IL: Israel is creating a new database of credit information to enable lending. What about the risk of an Equifax-style hack?
HB: We are really happy and proud that the credit database became active in Israel this year. This kind of thing has existed in many other countries for years. The Bank of Israel made it happen and also built around it a kind of “Iron Dome” to defend it from cyberattacks. The Equifax hack is definitely a major event that teaches what risks can be realized. It’s impossible to say that events like this can’t happen; our job is to be prepared and to recover in a quick way with minimum damage. This is a topic that’s on our agenda in the Supervisor of Banks. We took many steps not just for the credit bureau but for the whole banking system so there won’t be a large data breach like that. It requires continuous work; it’s a big risk.
IL: In 2016, Israel passed a law that effectively limited the annual pay of top bank executives to 2.5 million shekels ($712,000). Could this stifle innovation?
HB: My assessment is no. Despite this salary cap on senior executives, which is unique on a global level, we don’t see evidence at least at this stage that it’s restricting innovation or the ability to recruit good people. Banking is still a leading sector, very influential on the economy, undergoing a large digital transformation. Good people want to be in bank management, want to be a CEO of a bank. Of course legislators in Israel need to evaluate this restriction and whether some kind of refining is necessary. Young people today may be more attracted to the world of technology because there are high salaries and good conditions. Down the road we want our best kids to manage the public’s money responsibly, so in the medium term we need to examine this issue. But for now the system is changing and innovating in a really professional way.
IL: Are the banks ready for potential big tech rivals?
HB: Definitely the big techs could be a game changer in the world and also Israel, if and when they decide to enter banking in a more significant way. The banks need to take more steps to be ready if this happens.
IL: I’ve heard criticism that you should be moving even faster to deregulate to make it easier for new players to enter the market.
HB: In Israel the financial system went through the financial crisis very successfully, and there wasn’t even a moment of doubt that a bank would go bankrupt. This comes from the regulation and the conservative management. But still I understand this criticism. I think that we took a big leap in the past few years to be faster, to permit innovation, but there’s always room to improve.
IL: Israeli banks have a reputation for slow service, long lines. What is it like trying to improve on that?
HB: In the past few years we as a regulator put a lot of pressure on the banks to improve service, and the banks took steps. For example, a few months ago we did a satisfaction survey of Israeli households, a very large survey, and we published it for the public. This created a lot of buzz. The survey showed that for the small and midsize entities, customer satisfaction was much higher than for the big banks. We also saw that digital service was very good; really, almost all the banks received more than 90 on a scale of 0 to 100. We as a regulator demanded that the banks streamline and reduce branches but also improve the service, with an emphasis on the older customers who need more digital guidance.
IL: Israel is working to introduce securitization and long-term interest-rate derivatives. Will that be difficult?
HB: We definitely want a more sophisticated capital market in Israel, and unfortunately some financial tools that are very accepted elsewhere don’t exist here. The Bank of Israel supports the development of a securitization market. A committee that has members from all of the regulators is addressing the issue. We believe this is important to permit all the players in the economy, banks and also nonbank entities, to manage their credit portfolio more dynamically, to increase liquidity. It would permit credit card companies to access liquidity. The entire economy will benefit.
We learned from the financial crisis, when they had very complex tools. Here we are talking about plain-vanilla securitization and tools that are clear and transparent.
IL: Does all this reform ever feel risky?
HB: Definitely. We need to ensure that the reforms are enacted and then let the dust settle so that we can see how the new equilibrium is doing, so that there aren’t unmanaged risks. It’s possible that down the road we’ll need to refine some things.
IL: What’s your long-term vision for Israeli banks?
HB: I expect that the banking system will be more competitive, more innovative and technological, more efficient. The benefits will go to households and small businesses. The shareholders of the banks will enjoy these fruits, and more than 80% of the shares are in the hands of the wider public directly or via institutional investors, Israelis or foreigners.
In the area of payments, Israel lags a large part of the world. We have a vision that in the coming years there will be significant changes to permit more advanced payments, so it will be possible to pay businesses with a cellphone, digitally. We really hope international players will enter the market.
IL: Now that you’ve approved a new bank, will you open an account there?
HB: Of course. No question.