The 2001 Financial System Stability Assessment (FSSA) concluded that the Bank of Israel (BoI) largely complied with the Basel Core Principles (BCPs) for Effective Banking Supervision. While a 2006 mission by the International Monetary Fund (IMF) did not conduct a reassessment of Israel's compliance with the BCP, the earlier conclusions reached during the FSSA remained consistent with the findings of the 2006 mission. The caliber of the BoI supervisors is generally strong with considerable depth of quality in the department. The BoI provides continuous oversight over the systemically relevant institutions largely in line with best supervisory practices. Nonetheless, the report indicates that the supervisory effectiveness could be strengthened further. According to the IMF, the BoI needs to move towards a more risk-based supervision process based on supervisory principles. The objectives of the BoI are properly aligned toward supervising the five largest institutions. Prudential issues, however, such as the high level of problem loans, the level of provisioning, the relatively low capital levels, and low earnings receive less attention. A risk-based approach focuses supervision on reviewing bank performance against sound risk management practices rather than relying on the resource-intensive review of compliance with prescriptive rules.

General Overview

The 2001 Financial System Stability Assessment (FSSA) concluded that the Bank of Israel (BoI) largely complied with the Basel Core Principles (BCP) for Effective Banking Supervision. While a 2006 mission by the International Monetary Fund (IMF) did not conduct reassessment of Israel's compliance with the BCP, the earlier conclusions reached during the FSSA remained consistent with the findings of the mission. The caliber of the BoI supervisors is generally strong with considerable depth of quality in the department. The BoI provides continuous oversight over the systemically relevant institutions largely in line with best supervisory practices. Nonetheless, supervisory effectiveness could be strengthened further. (IMF 2006, p. 106)

To strengthen supervisory effectiveness, the BoI needs to move towards a more risk-based supervision process based on supervisory principles. The objectives of the BoI are properly aligned toward supervising the five largest institutions, consistent with the critical role of these institutions in the economy. Very important prudential issues, however, such as the high level of problem loans, the level of provisioning, the relatively low capital levels, and low earnings may receive less attention. A risk-based approach focuses supervision on reviewing bank performance against sound risk management practices rather than relying on the resource-intensive review of compliance with prescriptive rules. Such an approach would allow for greater allocation of BoI resources according to risk. Such a risk-based resource allocation would have several elements. It could include the analysis of systemic risks and focusing supervisory efforts on those activities in systemically important institutions that are perceived to be riskiest and where risk controls are weak. (IMF 2006, p. 108)

The BoI is in the early stages of gearing up to implement Basel II. In 2004, the BoI issued a paper to the banking industry that set out a timetable for the adoption of the Basel II capital framework beginning in 2008. There are over 80 areas of national discretion that will need to be reconciled with the unique characteristics of Israeli banking practice and mapped to the supervisory process. Given the ambitious timeline for the announced implementation of Basel II, the BoI should consider: (1) a significant increase in BoI staffing resources to develop the implementation strategy and prepare regulatory guidance; and/or (2) extending the timeline for implementation. (IMF 2007, p. 109)

According to the 2001 IMF assessment, Israel has a competent and professional supervisory staff and satisfactory legal and regulatory framework to supervise banks. The BoI is the sole supervisor of banks and the Banking Supervision Department (BSD) of the BoI undertakes this task. The legal framework applying to the supervision of banks, and to banking activity more generally, appears adequate, but is somewhat outdated and in places unclear. However, weaknesses in the applicable laws have not significantly hindered the supervision of banks, including the application of remedial action. The IMF recommended the enactment of a new Bank of Israel Law that would be more in tune with current requirements. (IMF 2001, pp. 46-47) As of 2007, there is no further information publicly available as to the enactment of a new Bank of Israel Law.

Israel has a large and concentrated banking system. As of end-September, 2005, the system had assets of Israel Shekel (NIS) 875 billion or about US$193 billion. The system is highly concentrated, with the five largest banking groups accounting for about 95 percent of system assets. Among the five largest banking groups, Leumi and Hapoalim each controls about 30 percent of system assets. Two foreign banks, Citigroup and HSBC, have a branch each, but do not have a material asset base. (IMF 2006, p. 105)

The condition of the banking system is improving, albeit from a low base following the 2001-2002 recession. The banking system has high levels of problem loans, low profitability, and relatively low capital levels compared to its international peers. Problem loans in the system, a large share of which is in the real estate and construction sector, average about 10 percent (for the five largest banks, problem loans range from 6 percent to 13 percent of total loans). Through end September, the banking system reported net income of NIS 5.3 billion or 0.8 percent annualized return on assets compared to a 0.6 percent ratio for 2004. Capital levels are low, with risk-based capital ratios for the five largest banks ranging from 9.7 to 12.2 percent (the regulatory minimum is 9 percent). The banking system enjoys ample liquidity provided primarily through deposit funding. (IMF 2006, p. 106)

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Israel was in compliance with all the requirements of Principle 1 with the exception of information sharing by the Bank of Israel. A subsequent update by the IMF in 2003, however, indicated that Israel did not full comply with issues related to objectives, autonomy and powers. (IMF 2001, p. 47; IMF 2003, p. 3) However, there is no further information regarding Israel's compliance with this Principle.

Banking supervision by and large is well defined, with clear and generally adequate responsibilities and powers given to the Banking Supervision Department (BSD) of the Bank of Israel (BoI). Its policies and rules are clearly communicated to the public. (IMF 2001, p. 50)

The main task of the Banking Supervision Department in the Bank of Israel (BoI) is to preserve the stability and robustness of Israel's banking system. The Banking Supervision Department operates concurrently to increase competition in the system and to guarantee fair customer-bank relations, while ensuring that banks' managements and boards of directors meet appropriate standards of management and oversight. The regulation of banking activity is the principal instrument of the Banking Supervision Department, enabling it to instruct banking institutions regarding the position and directives of the Supervisor of Banks on various banking and accounting subjects. (BoI 2006, p. 123)

1.(2) Operational independence and adequate resources.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Israel was in compliance with all the requirements of Principle 1 with the exception of information sharing by the Bank of Israel. A subsequent update by the IMF in 2003, however, indicated that Israel did not full comply with issues related to objectives, autonomy and powers. (IMF 2001, p. 47; IMF 2003, p. 3) However, there is no further information regarding Israel's compliance with this Principle.

In 2003, according to an IMF report, the Bank of Israel (BoI) and the Ministry of Finance (MoF) proposed an amendment to the banking ordinance that will upgrade the BoI's independence twofold. The Governor of the BoI will be empowered to suspend and nullify the votes of shareholders who act without a permit from the BoI when such a permit is required. The Supervisor of Banks will have the authority to dismiss directors, managers and signatory persons if the bank does not undertake corrective action. (IMF 2003, pp. 4-5) However, no further information regarding the implementation of this amendment is publicly available.

1.(3) A suitable legal framework for authorization and ongoing supervision.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Israel was in compliance with all the requirements of Principle 1 with the exception of information sharing by the Bank of Israel. A subsequent update by the IMF in 2003, however, indicated that Israel did not full comply with issues related to objectives, autonomy and powers. (IMF 2001, p. 47; IMF 2003, p. 3) However, there is no further information regarding Israel's compliance with this Principle.

The legal framework applying to the supervision of banks, and to banking activity more generally, appears adequate. There have been no significant hindrances to the supervision of problem banks, including the application of remedial action. (IMF 2001, p. 46)

However, in a few respects, and through no particular fault of the Banking Supervision Department (BSD) of the Bank of Israel (BoI), governance falls short of best practices because of the weakness of the underlying legislation, which appears inadequate in contemporary conditions. The IMF in its 2001 assessment of the Israel's financial sector recommended the enactment of a new Bank of Israel Law that would be more in tune with current requirements. (IMF 2001, p. 51) However, there in further information publicly available as to the enactment of this law.

The main role of the Institutional Evaluation Units is to collect and formulate the periodical assessments of the Banking Supervision Department regarding the stability and resilience of the banking corporations (including auxiliary banking corporations, banking subsidiaries, and overseas branches). The five units responsible for assessing the banking groups and corporations operated on the basis of an annual work plan which dealt inter alia with the following topics: (1) ongoing follow-up and periodical assessment of Israel's banking institutions; (2) the progress made by the banks in implementing the interim directives as regards the Prohibition of Money Laundering Order, and the actions they have taken to achieve this end; (3) banking corporations' credit exposure: foreign-currency credit and credit to the principal industries, e.g., the construction industry and the local authorities, and large exposure; (4) the exposure of the banking corporations to liquidity risk in local and foreign currency; (5) regulation of the supervision and follow-up of the credit card companies; and (6) examination of adherence to the directives issued by the Supervisor of Banks in various spheres, such as the procedure for appointing directors and for issuing complex tier-1 capital. The sixth unit in the sphere of institutional evaluation, the Licensing Unit, which deals with requests which require a license from the Governor of the Bank of Israel or from the Supervisor of Banks. (BoI 2006, p. 124)

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Israel was in compliance with all the requirements of Principle 1 with the exception of information sharing by the Bank of Israel. A subsequent update by the IMF in 2003, however, indicated that Israel did not full comply with issues related to objectives, autonomy and powers. (IMF 2001, p. 47; IMF 2003, p. 3) However, there is no further information regarding Israel's compliance with this Principle.

The legal framework applying to the supervision of banks, and to banking activity more generally, appears adequate. There have been no significant hindrances to the supervision of problem banks, including the application of remedial action. (IMF 2001, p. 46)

The main role of the Institutional Evaluation Units is to collect and formulate the periodical assessments of the Banking Supervision Department regarding the stability and resilience of the banking corporations (including auxiliary banking corporations, banking subsidiaries, and overseas branches). The five units responsible for assessing the banking groups and corporations operated on the basis of an annual work plan which dealt inter alia with the following topics: (1) ongoing follow-up and periodical assessment of Israel's banking institutions; (2) the progress made by the banks in implementing the interim directives as regards the Prohibition of Money Laundering Order, and the actions they have taken to achieve this end; (3) banking corporations' credit exposure: foreign-currency credit and credit to the principal industries, e.g., the construction industry and the local authorities, and large exposure; (4) the exposure of the banking corporations to liquidity risk in local and foreign currency; (5) regulation of the supervision and follow-up of the credit card companies; and (6) examination of adherence to the directives issued by the Supervisor of Banks in various spheres, such as the procedure for appointing directors and for issuing complex tier-1 capital. The sixth unit in the sphere of institutional evaluation, the Licensing Unit, which deals with requests which require a license from the Governor of the Bank of Israel or from the Supervisor of Banks. (BoI 2006, p. 124)

1.(5) Legal protection for supervisors.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Israel was in compliance with all the requirements of Principle 1 with the exception of information sharing by the Bank of Israel. (IMF 2001, p. 47) However, there is no further information regarding Israel's compliance with this Principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Israel was in compliance with all the requirements of Principle 1 with the exception of information sharing by the Bank of Israel. There are secrecy laws within the Banking Ordinance, which prevent the Bank of Israel (BoI) from discussing problems within an individual Israeli bank with other supervisors (domestic or foreign). However, a subsequent update by the IMF in 2003 indicate that the BoI received irrevocable consent from all the Israeli banks that operate abroad with banking offices to let the BoI disclose to foreign host supervisors supervisory information that is necessary for them to perform effective consolidated supervision. The authority to disclose information to host country supervisors will be enforced via Amendment No. 13 to the Banking Ordinance. (IMF 2001, p. 47; IMF 2003, p. 4) However, there is no further information regarding Israel's compliance with this Principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Bank of Israel (BoI) complies with the principles on licensing, with minor exceptions. There is a general prohibition of deposit taking that prevents significant abuses by unlicensed institutions, although this could be tightened further. (IMF 2001, p. 47) However, there is no further information regarding Israel's compliance with this Principle.

The sixth unit of the Banking Supervision Department of the BoI is in the sphere of institutional evaluation, the Licensing Unit, which deals with requests which require a license from the Governor of the Bank of Israel or from the Supervisor of Banks. (BoI 2006, p. 124)

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Bank of Israel (BoI) complies with the principles on licensing, with minor exceptions. There is a general prohibition of deposit taking that prevents significant abuses by unlicensed institutions, although this could be tightened further. (IMF 2001, p. 47) However, there is no further information regarding Israel's compliance with this Principle.

4. Authority to review and reject transfer of ownership.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Bank of Israel (BoI) complies with the principles on licensing, with minor exceptions. There is a general prohibition of deposit taking that prevents significant abuses by unlicensed institutions, although this could be tightened further. The BoI needs to consider implementing arrangements that ensure all material investments and acquisitions, covering both financial and non-financial and domestic and foreign investments, are conveyed to the Banking Supervisory Department (BSD) in advance. Such arrangements should be structured in a way that the BoI can handle the acquisition, but does not need to take responsibility for the "soundness" of the acquisition itself. (IMF 2001, p. 47) However, there is no further information regarding Israel's compliance with this Principle.

5. Authority to review major acquisitions and investments.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Bank of Israel (BoI) complies with the principles on licensing, with minor exceptions. There is a general prohibition of deposit taking that prevents significant abuses by unlicensed institutions, although this could be tightened further. The BoI needs to consider implementing arrangements that ensure all material investments and acquisitions, covering both financial and non-financial and domestic and foreign investments, are conveyed to the Banking Supervisory Department (BSD) in advance. Such arrangements should be structured in a way that the BoI can handle the acquisition, but does not need to take responsibility for the "soundness" of the acquisition itself. (IMF 2001, p. 47) However, there is no further information regarding Israel's compliance with this Principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), Israeli banks are required to maintain a risk-weighted capital ratio, calculated in accordance with the broad framework of the Basel Capital Accord, of at least 9 percent at all times (including a market risk capital charge). In some instances, the BoI has adopted tighter requirements providing some additional comfort. (IMF 2001, p. 47) However, there is no further information regarding Israel's compliance with this Principle.

A 2006 report by the IMF indicates that the banking system has high levels of problem loans, low profitability, and relatively low capital levels compared to its international peers. Capital levels are low, with risk-based capital ratios for the five largest banks ranging from 9.7 to 12.2 percent (the regulatory minimum is 9 percent). (IMF 2006, p. 106)

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), there are comprehensive rules for granting credit and for the evaluation of loans and of loan-loss provisions. The Bank of Israel (BoI) directive on problem loans uses a classification system that is somewhat unique to Israel, including the reporting of problem debts solely on a net basis (i.e. after deducting provisions). Reporting to the supervisor on problem loans according to classification is also limited to an annual return, although there is a quarterly collection that gathers some data broken down by industry. A subsequent update by the IMF in 2003, however, indicated that BoI enhanced the scrutiny over problem loans by requiring a quarterly reporting of the problem loan exposure to be included in the Board of Directors' statement in the financial reports. In addition, a team has been set up internally to devise a methodology for a loan classification based on credit ratings, and its first draft report has been drawn up. The BoI also drafted a position paper regarding the commonly accepted definitions of problem loans based on the practice abroad. In regard to loan security, the BoI has instituted a quarterly reporting requirement of non-recourse loans that are extended in highly leveraged transactions, which includes data on the collateral offered by the borrower. (IMF 2001, p. 47; IMF 2003, p. 4) However, there is no further information regarding Israel's compliance with this Principle.

A 2006 report by the IMF indicates that the banking system has high levels of problem loans, low profitability, and relatively low capital levels compared to its international peers. Problem loans in the system, a large share of which is in the real estate and construction sector, average about 10 percent (for the five largest banks, problem loans range from 6 percent to 13 percent of total loans). Through end September, the banking system reported net income of Israel Shekel (NIS) 5.3 billion or 0.8 percent annualized return on assets compared to a 0.6 percent ratio for 2004. The banking system enjoys ample liquidity provided primarily through deposit funding. (IMF 2006, p. 106)

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), there are comprehensive rules for granting credit and for the evaluation of loans and of loan-loss provisions. The Bank of Israel (BoI) directive on problem loans uses a classification system that is somewhat unique to Israel, including the reporting of problem debts solely on a net basis (i.e. after deducting provisions). Reporting to the supervisor on problem loans according to classification is also limited to an annual return, although there is a quarterly collection that gathers some data broken down by industry. A subsequent update by the IMF in 2003, however, indicated that BoI enhanced the scrutiny over problem loans by requiring a quarterly reporting of the problem loan exposure to be included in the Board of Directors' statement in the financial reports. In addition, a team has been set up internally to devise a methodology for a loan classification based on credit ratings, and its first draft report has been drawn up. The BoI also drafted a position paper regarding the commonly accepted definitions of problem loans based on the practice abroad. In regard to loan security, the BOI has instituted a quarterly reporting requirement of non-recourse loans that are extended in highly leveraged transactions, which includes data on the collateral offered by the borrower. (IMF 2001, p. 47; IMF 2003, p. 4) However, there is no further information regarding Israel's compliance with this Principle.

A 2006 report by the IMF indicates that the banking system has high levels of problem loans, low profitability, and relatively low capital levels compared to its international peers. Problem loans in the system, a large share of which is in the real estate and construction sector, average about 10 percent (for the five largest banks, problem loans range from 6 percent to 13 percent of total loans). Through end September, the banking system reported net income of Israel Shekel (NIS) 5.3 billion or 0.8 percent annualized return on assets compared to a 0.6 percent ratio for 2004. The banking system enjoys ample liquidity provided primarily through deposit funding. (IMF 2006, p. 106)

9. Prudential limits and management information system on concentration of exposure.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), large and related party exposures are tightly defined and require Board approval in accordance with Bank of Israel (BoI) directives. However, the Basel Core Principles recommend additional scrutiny for related party exposures over and above the regular credit management process; in particular, the BoI should encourage independent scrutiny of related-party exposures on an on-going basis. (IMF 2001, pp. 47-48) However, there is no further information regarding Israel's compliance with this Principle.

10. Arm's length rule and monitoring for connected lending.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), large and related party exposures are tightly defined and require Board approval in accordance with Bank of Israel (BoI) directives. However, the Basel Core Principles recommend additional scrutiny for related party exposures over and above the regular credit management process; in particular, the BoI should encourage independent scrutiny of related-party exposures on an on-going basis. (IMF 2001, pp. 47-48) However, there is no further information regarding Israel's compliance with this Principle.

11. Policies and procedures for country risk and transfer risk.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), more work was required to develop a more systematic framework for the assessment of country and transfer risk. The report recommended that the Bank of Israel (BoI) should set out explicit requirements for these risks, including a requirement for banks to create and maintain adequate policies and procedures. The BoI has recently expanded the disclosure of banks' activity by country distribution in annual financial reports. A draft report has been drawn up to introduce disclosure of country risk exposure and to incorporate a methodology for managing country risk similar to what is practiced in the United States. (IMF 2001, p. 48; IMF 2003, p. 4) However, there is no further information regarding Israel's compliance with this Principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

CP

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), for market risks, the Bank of Israel's (BoI) compliance is high, reflecting a strong research effort in recent years. (IMF 2001, p. 48) However, there is no further information regarding Israel's compliance with this Principle.

13. Comprehensive risk management processes.

FC

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the risk management process in place in Israel is in compliance with this Principle. (IMF 2001, p. 48)

14. Adequate internal controls.

FC

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the internal controls in place in Israel are in compliance with this Principle. (IMF 2001, p. 48)

15. Strict "know-your-customer" rules and high ethical and professional standards.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), in 2001 the existing laws on money laundering were inadequate. However, a subsequent report by the IMF in 2005 indicate that overall, current measures in Israel to prevent money laundering/financing of terrorism (ML/FT) are extensive and, for the most part, adequate as a framework for anti money laundering/combating the financing of terrorism (AML/CFT). The report further indicates that Israel complies well with the Financial Action Task Force's (FATF) 40+8 Recommendations. Israel enacted the Prohibition on Money Laundering Law (PMLL) in August 2000, as a comprehensive legislation that addresses money laundering as a criminal offence, as well as customer identification, record-keeping, and reporting requirements. Israel has promulgated numerous regulations to implement the PMLL. (IMF 2001, p. 48; IMF 2005, pp. 4, 8, 11) However, there is no further information regarding Israel's compliance with this Principle.

In 2001, Israel adopted the Banking Corporations Requirement Regarding Identification, Reporting, and Record Keeping Order. The Order establishes specific procedures for banks with respect to customer identification, record keeping, and the reporting of irregular and suspicious transactions. The PMLL requires the declaration of currency transferred (including cash, travelers' checks, and banker checks) into or out of Israel for sums above 80,000 new Israeli shekels (NIS) (approximately $17,200). This applies to any person entering or leaving Israel, and to any person bringing or taking money into or out of Israel by mail or any other methods, including cash couriers. This offense is punishable by up to six months imprisonment or a fine of NIS 202,000 (approximately $43,400), or ten times the amount that was not declared, whichever is higher. Alternatively, an administrative sanction of NIS 101,000 (approximately $21,700), or five times the amount that was not declared, may be imposed. In 2003, the Government of Israel (GOI) lowered the threshold for reporting cash transaction reports (CTRs) to NIS 50,000 (approximately $10,500), lowered the document retention threshold to NIS 10,000 (approximately $2,100), and imposed more stringent reporting requirements. (U.S. DoS 2007)

Israel's AML legislation applies to banking corporations; members of the stock exchange; portfolio managers; insurers; and insurance agents; provident funds and companies managing provident funds; the postal bank; and providers of currency service. Seven orders were issued to each of the financial sectors that require customer identification, record keeping, and submission of Unusual Transaction Reports (UTRs) and and Currency Transaction Reports (CTRs). In January 2002, the Israel Money Laundering Prohibition Authority (IMPA) became operational as Israel's financial intelligence unit (FIU) and began receiving UTR and CTR reports in February 2002. (IMF 2005, pp. 5, 8)

Israel's institutional arrangements for AML/CFT involve numerous institutions. The IMPA has the responsibility for receiving and disseminating reports based upon CTRs and UTRs. The Bank of Israel (BOI) has responsibility for the AML oversight of banks; the Israel Securities Authority for the securities industry; the Ministry of Finance (MoF) for insurance, currency service providers, and provident funds; and the Ministry of Communication for the postal bank. Offices within the Ministry of Justice have responsibility for ML/FT prosecutions. The police and customs service investigate ML cases, initiate seizures, and address cross-border transfers. Several interagency groups or task forces also have responsibility for various aspects of AML/CFT. (IMF 2005, p. 5)

According to a 2007 IMF report, a vulnerability in the Israeli banking system is the risk of money laundering, particularly in foreign offices of Israeli banks. It is important that bank policies and oversight of anti-money laundering (AML) requirements cover the group-wide operations, not just compliance by the domestic operations of Israeli banks. In this regard, host-country regulators (and law enforcement agencies) have identified the foreign operations of several of the larger banks as not yet complying with local laws and regulations. Some of the actions taken in response have been severe and demonstrate the need to strengthen risk-management practices over AML in foreign offices. (IMF 2006, p. 109)

The IMF makes two recommendations for the AML area namely: (1) BoI carry out a review of the adequacy of the group-wide AML policies and the internal control processes in Israeli banks; and (ii) the authorities undertake a self-assessment of the AML regime against the revised FATF Recommendations and the revised assessment methodology. The review of bank practices by the BoI should determine whether oversight by bank management and boards of directors is sufficiently robust to ensure compliance with local legal requirements and that observed deficiencies are not more widespread. (IMF 2006, p. 109)

16. Effective supervisory system consisting of on-site and off-site supervision.

FC

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the framework for on-site and off-site supervision at the Bank of Israel (BoI) complies with the requirements for this Principle. The Banking Supervision Department management is highly conscious of the need to ensure off-site and on-site supervision is highly integrated, particularly given the former is located in Jerusalem and the latter in Tel Aviv (where the major banks are headquartered). (IMF 2001, p. 48)

17. Regular contact with bank management and understanding of bank's operations.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), in assessing bank management, the Bank of Israel (BoI) uses the issuance of new licenses as the opportunity to impose a "fit and proper" regime. However, this needs to be expanded to cover all banks and extended to all directors and key members of management. A subsequent update by the IMF in 2003 indicate that the BoI and Ministry of Finance (MoF) have proposed an amendment to the banking ordinance which, in case of banks that have no controlling shareholders, makes the appointment of key positions, including division heads, internal auditors and compliance officers, conditional on the Supervisor of Bank's consent ("fit and proper" test). For banks that have a controlling shareholder, this prerogative will be limited to the directors, CEO and the Chair of the Audit Committee. (IMF 2001, p. 48; IMF 2003, p. 4) However, there is no further information regarding Israel's compliance with this Principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

FC

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the Bank of Israel (BoI) is compliant with this Principle. The BOI meets the requirements for consolidated supervision. (IMF 2001, p. 48)

The Information and Reporting Unit of the Banking Supervision Department of the BoI is responsible for receiving reports from the banks intended for the Supervisor of Banks and turning them into accessible and reliable data which can serve the Supervisor and the employees in the various units of the Banking Supervision Department. (BoI 2006, pp. 133-134)

19. Independent validation of supervisory information through on-site examination or external auditors.

FC

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the Bank of Israel (BoI) is compliant with this Principle, although it could usefully explore closer relationships with the banks' external auditors. (IMF 2001, p. 48)

This Financial Statements Unit of the Banking Supervision Department of the BoI deals with two main areas: (1) regulation of the directives regarding the guidelines for preparing reports for the public, which give instructions for drawing up the banking corporations' reports for the public, as well as subjects connected with the work of a banking corporation's internal auditor; and (2) undertaking audits of subjects connected with the banking corporations' financial statements to the public. (BoI 2006, p. 134)

20. Ability to supervise on a consolidated basis.

FC

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the Bank of Israel (BoI) is compliant with this Principle. The BoI meets the requirements for consolidated supervision. This reflects the fact that, notwithstanding the lack of coordination between supervisory agencies, the BoI itself directly monitors all banking group entities (even those that fall under other domestic supervisors, e.g. a securities trading subsidiary), and has the legal power to do so. The IMF report states that there is no doubt that group supervision is occurring in Israel. (IMF 2001, p. 48)

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

FC

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the Bank of Israel (BoI) is compliant with this Principle, although there may be some benefit in the BoI having the power, on an ad hoc basis, to direct the scope and standard of the work of bank external auditors. (IMF 2001, p. 48)

According to a 2006 IMF report, the BoI is responsible for setting the accounting, financial reporting, and disclosure requirements for the banking system. The BoI has carried out this role in an outstanding fashion and requires banks to follow U.S. generally accepted accounting principles (US-GAAP). Reporting and disclosure requirements are in line with internationally accepted practices and the quality of that reporting is high. Israeli banks will be applying US GAAP while all other public companies in Israel apply the International Financial Reporting Standards (IFRS). This will make cross-sectoral comparisons of financial statements difficult. The IMF recommends that the BoI consider developing a transition strategy for the banks to introduce IFRS by 2008 (or a more manageable timetable if that date would impose onerous system conversion problems for the banks.) (IMF 2006, p. 110)

This Financial Statements Unit of the Banking Supervision Department of the BoI deals with two main areas: (1) regulation of the directives regarding the guidelines for preparing reports for the public, which give instructions for drawing up the banking corporations' reports for the public, as well as subjects connected with the work of a banking corporation's internal auditor; and (2) undertaking audits of subjects connected with the banking corporations' financial statements to the public. (BoI 2006, p. 134)

22. Adequate supervisory measures to ensure timely corrective action.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), in practice, the Bank of Israel (BoI) acts promptly in all cases where there are supervisory concerns, even where there is only expectation of potential problems. However, it would be helpful to have included in legislation, an explicit statutory duty on the Supervisor of Banks to act promptly to address supervisory issues as and when they occur, to have problems remedied as soon as practical. This would make it clear that forbearance is not acceptable. (IMF 2001, pp. 48-39) However, there is no further information regarding Israel's compliance with this Principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the Bank of Israel (BoI) practices global consolidated supervision. (IMF 2001, p. 49) However, there is no further information regarding Israel's compliance with this Principle.

24. International exchange of information with other supervisors.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), while the Bank of Israel (BoI) practices global consolidated supervision, the secrecy provisions of the Banking Ordinance prevent the BoI from providing sufficient information on Israeli banks to foreign supervisors. While these provisions have been circumvented to a certain extent, by the use of license conditions for new banks, these provisions could be more comprehensive. However, a subsequent update by the IMF in 2003 indicate that the BoI received irrevocable consent from all the Israeli banks that operate abroad with banking offices to let the BoI disclose to foreign host supervisors supervisory information that is necessary for them to perform effective consolidated supervision. The authority to disclose information to host country supervisors will be enforced via Amendment No. 13 to the Banking Ordinance. However, there is no further information regarding Israel's compliance with this Principle. (IMF 2001, p. 49; IMF 2003, p. 4) However, there is no further information regarding Israel's compliance with this Principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

II

According to a 2001 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), while the Bank of Israel (BoI) practices global consolidated supervision, the secrecy provisions of the Banking Ordinance prevent the BoI from providing sufficient information on Israeli banks to foreign supervisors. While these provisions have been circumvented to a certain extent, by the use of license conditions for new banks, these provisions could be more comprehensive. However, a subsequent update by the IMF in 2003 indicate that the BoI received irrevocable consent from all the Israeli banks that operate abroad with banking offices to let the BoI disclose to foreign host supervisors supervisory information that is necessary for them to perform effective consolidated supervision. The authority to disclose information to host country supervisors will be enforced via Amendment No. 13 to the Banking Ordinance. However, there is no further information regarding Israel's compliance with this Principle. (IMF 2001, p. 49; IMF 2003, p. 4) However, there is no further information regarding Israel's compliance with this Principle.