General Overview
In its 2001 assessment, the International Monetary Fund (IMF) found that the payment system in Israel has evolved without any systematic oversight. As a result, each is technically sound but was designed without the core principles in mind. The efficient and timely functioning of these systems are based on the assumption that the Bank of Israel (BoI) will cover any losses that may result after the fact from the settlement of customer, bank, or clearinghouse net payments. This situation would either expose the BoI to potentially large losses, or the payment system to considerable disruption in the event of the failure of a large bank. However, the IMF concluded that the high quality of banking supervision makes the prospect of such a failure very low. (IMF 2001, p. 32)
The Israeli payment system comprises a number of clearing and settlement systems provided by the Bank of Israel (BoI) and by the private sector. The BoI operates a system for setting interbank liquidity trading, clearinghouse positions, and other interbank transactions. In 2001 the International Monetary Fund (IMF) conducted an assessment of Israel's payment systems, specifically those operated by the BoI and in 2003 the IMF released an update on the 2001 assessment. The 2001 assessment found Israel's observance of the Core Principles for Systematically Important Payment Systems (CPSIPS) to be mixed. The 2001 assessment reported that settlement for various clearing processes involved de facto credit risk for the BoI, because the BoI was unable to check the availability of funds at the moment when it officially or unofficially accepted the outcome of the clearing. However, the IMF's 2003 update on Israel's payment system indicates that the Comptroller of the BoI who has been made explicitly responsible for the oversight of the payment and settlement system in Israel has proposed a two-part reform - the adaptation of the existing systems to international core principles; and the establishment of a new Real Time Gross Settlement (RTGS) system. ( IMF 2001, p. 31; IMF 2003, pp. 5-6)
Israel's payment and settlement systems comprise the Banks' Clearing House (BCH), the interbank Banks' Clearing Center (BCC, or Masav), the Tel Aviv Stock Exchange (TASE), the credit card companies, and the BoI's settlement systems - one for trading in liquidity, one for trading New Israeli Shekel (NIS) against the dollar, and a central accounting system. The BoI's central accounting system serves as the final settlement agency for all Israel's settlement systems. Settlement is on a net basis, and takes place at the end of the trading day; results are generally settled with a delay of one trading day. (BoI 2003, pp. 43-44)
The Bank of Israel (BoI) and the commercial banking system form the backbone of Israel's payment system. While most of the other payment and clearing services are provided by the commercial banks and their affiliates, the BoI has played an important role in establishing and directing the interbank clearing systems. The BoI manages current and other accounts for the government, the banks and various other entities, and transfers across these accounts are the principal method of settlement between these entities. The BoI also directly manages two systems for large-value transactions. The first is for interbank transfers in connection with liquidity trading (in order to meet the BoI's reserve requirements), while the other is an interbank system for settlement of USD/NIS transactions, operated by the Foreign Currency Department of the BoI. (BIS 2000, p. 1)
The BCH is a non-incorporated body that deals with the clearing of all paper-based instruments (checks, etc). The members of the BCH are the BoI, commercial banks and the Post Office Bank. The activities of the BCH are regulated by the Banks' Clearing House Committee (BCHC). Israel's payment system is regulated and supervised at two levels: legislation - which deals primarily with the relationship between the customer and payment system's participants; clearing house regulations - these regulations are a voluntary agreement which regulates the relationship between participants (i.e. the commercial banks) and the Bank of Israel. (BIS 2000, pp. 4,13)
Although there is no single all-encompassing law regarding the payment system, there are several items of legislation that address related topics and the means of payment. Article 48 of the Bank of Israel Law of 1954, states that the BoI may accept deposits from banking corporations. Furthermore, under the BoI Law, one of the functions of the BoI is to administer, regulate and direct the currency system, as well as to regulate and direct the credit and banking system in Israel. The Banking (Licensing) Law of 1981, refers inter alia to the spheres of activity permitted to banks, and states that a bank may engage in the management of a system of payments, including the collection, transfer and conversion of money. There is a contractual agreement between the BoI and the banks regarding the operation of the clearing houses. With regard to payment instruments, it should be noted that the Bills Ordinance deals with relations between the parties to a bill (including a check) from the viewpoint of civil law. Credit cards are covered by the provisions of the Debit Card Law of 1986, which inter alia regulates contractual relations between the holders and issuers of such cards. The Banking (Service to Customers) Regulations determine inter alia when a check is credited with finality. In addition, under the Checks Without Cover Law of 1981, restrictions are imposed on customers who persistently issue checks without cover. (BIS 2000, p. 3)
According to the BoI's 2006 Annual Report, preparations for the activation of the RTGS system, to be known as Zahav, continued in 2006. The preparations included adjusting the existing systems to updated international standards. All payment systems in local currency will undergo changes, and will ultimately be directly connected to the new payments system. The new payments system will reduce the risks for the entities using it, especially the Bank of Israel. The major implications of the reform concern both the finality of the banks' balances at the Bank of Israel, and the business hours of the banking day. The implementation of the principle of the finality of the balance necessitates the cancellation of all the accounting records in which the value date is retroactive. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. To prepare for the transition to Zahav, the settlement process was reformed and the banking business day was extended. In 2005, the possibility of retroactive recording in accounts with banks and the Bank of Israel was abolished and electronic clearing of checks became universal. From February 2006, the banking business day was extended to 18:30 instead of 15:00. (BoI 2005, pp. 137-138; BoI 2007, pp. 142-143)
The Principles
I. The system should have a well-founded legal basis under all relevant jurisdictions. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), rules and regulations applicable to the payment system are based on several laws, on regulations by the Supervisor of the banks, and by the contractual arrangements. The rule of law is well and long established in Israel. Contracts, laws, and rules are relatively and efficiently enforceable. The rules governing payment systems are clear and adhered to. (IMF 2001, pp. 54-55) However, there is no further information publicly available as to Israel's compliance with this Principle.
II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), rules and regulations applicable to the payment system are based on several laws, on regulations by the Supervisor of the banks, and by the contractual arrangements. The rule of law is well and long established in Israel. Contracts, laws, and rules are relatively and efficiently enforceable. The rules governing payment systems are clear and adhered to. (IMF 2001, pp. 54-55) However, there is no further information publicly available as to Israel's compliance with this Principle.
In its 2001 assessment the IMF noted that the practice of the Bank of Israel (BoI) in settlement gives the banks the impression the BoI will take care of the risks and does not give them the proper incentives to manage the risks in the system. (IMF 2001, pp. 32) However, there is no further information publicly available as to Israel's compliance with this Principle.
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), there is no oversight or systemic responsibility in the area of payment expenses. A division of the Banking Supervision Department looks after the rules and practical arrangements for the supervised banks participating in the clearing system for both paper-based and electronic transfer instructions. While value is almost always given on presentation date T, final settlement generally takes place on date T+1 or T+2. Although in theory the BoI is able to reverse a transaction for which insufficient funds are available, in the event of major bank failure, it appears unlikely it would be able to do so without the risk of a collapse of the system due to the 'domino' effect of consequential unwinding. In practice, therefore, system participants assume that the BoI will bear all of the credit risk arising from delayed settlement. This moral hazard gives rise to mis-pricing of credit within the payment systems. (IMF 2001, pp. 54, 55) However, there is no further information publicly available as to Israel's compliance with this Principle.
Another issue pointed out in the 2001 IMF assessment is that settlement for the different clearing processes involves de facto credit risk for the Bank of Israel, which is not able to check the availability of funds at the moment that it officially or unofficially accepts the outcome of the clearing. Moreover, banks seem to assume that the BoI accepts the risk. As a consequence, banks have not really prepared themselves, either in terms of setting appropriate counterparty limits for the settlement process or in terms of having systems of measuring exposures in the payment system. In addition, the clearing processes themselves seem to be organized on the basis of the assumption that there is no settlement risk or that, if any, it will be taken by the BoI. Systems generally have no limits and no provisions like loss-sharing arrangements. The BoI is aware of the credit risk issue that is inherent in the present settlement system. (IMF 2001, pp. 32, 55)
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.) |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), in general, settlement does not take place on the same day and, where netting takes place, the systems do not have provisions to settle the position of the largest defaulter. (IMF 2001, p. 55) However, there is no further information publicly available as to Israel's compliance with this Principle.
The practice of the Bank of Israel (BoI) in the settlement gives the banks the impression the BoI will take care of the risks and does not give them the proper incentives to manage the risks in the system. There is no oversight or systemic responsibility in the area of payment expenses. A division of the Banking Supervision Department looks after the rules and practical arrangements for the supervised banks participating in the clearing system for both paper-based and electronic transfer instructions. While value is almost always given on presentation date T, final settlement generally takes place on date T+1 or T+2. Although in theory the BoI is able to reverse a transaction for which insufficient funds are available, in the event of major bank failure, it appears unlikely it would be able to do so without the risk of a collapse of the system due to the 'domino' effect of consequential unwinding. In practice, therefore, system participants assume that the BoI will bear all of the credit risk arising from delayed settlement. This moral hazard gives rise to mis-pricing of credit within the payment systems. (IMF 2001, pp. 54, 55)
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.) |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), in general, settlement does not take place on the same day and, where netting takes place, the systems do not have provisions to settle the position of the largest defaulter. (IMF 2001, p. 55) However, there is no further information publicly available as to Israel's compliance with this Principle.
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), all systems settle in central bank money. (IMF 2001, p. 56) However, subsequently there is no further information publicly available as to Israel's compliance with this Principle.
VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), all systems have adequate provisions to ensure a high degree of security and operational reliability and have contingency arrangements for timely completion of daily processing. (IMF 2001, p. 56) However, subsequently there is no further information publicly available as to Israel's compliance with this Principle.
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), all systems are efficiently organized. (IMF 2001, p. 56) However, subsequently there is no further information publicly available as to Israel's compliance with this Principle.
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), the criteria for participation can be regarded as being objective and well publicized. (IMF 2001, p. 56) However, subsequently there is no further information publicly available as to Israel's compliance with this Principle.
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
X. The system's governance arrangements should be effective, accountable and transparent. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), governance of the systems is in principle adequate due to the involvement of the Bank of Israel (BoI) under its legal basis. Oversight by the Bank of Israel (BOI), however, is not as fully or clearly developed as in most other developed countries. Responsibilities are spread across several departments. (IMF 2001, pp. 54, 56) However, subsequently there is no further information publicly available as to Israel's compliance with this Principle.
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems. |
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According to a 2001 assessment of Israel's Payment Systems by the International Monetary Fund (IMF), responsibilities for the operation of various systems are clearly established and defined. Oversight by the Bank of Israel (BoI), however, is not as fully or clearly developed as in most other developed countries. Responsibilities are spread across several departments. Furthermore, the BoI approaches payment systems issues very much from a supervisory perspective, which does not properly reflect the responsibilities for the payment system that are assumed in the Bank for International Settlement's (BIS) Core Principles. (IMF 2001, pp. 54, 56) However, there is no further information publicly available as to Israel's compliance with this Principle.
The main function of the Bank of Israel in the context of the payment system is to serve as a settlement provider for interbank settlements (eg settling in its books the obligations arising from the transactions in the Banks' Clearing House and the stock exchange clearing houses). As set out in the Bank of Israel Law, 1954, the functions of the central bank are to administer, regulate and direct the currency system, and to regulate and direct the credit and banking system in Israel, in accordance with the economic policy of the government, by formulating and implementing monetary policy so as to stabilize the value of the currency inside and outside Israel and achieve a high level of production, employment, national income and capital investments in Israel. (BIS 2000, pp. 4, 13)
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
B. The central bank should ensure that the systems it operates comply with the Core Principles. |
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In its 2001 assessment, the International Monetary Fund (IMF) found that the payment system in Israel has evolved without any systematic oversight. As a result, each is technically sound but was designed without the core principles in mind. The efficient and timely functioning of these systems are based on the assumption that the Bank of Israel (BoI) will cover any losses that may result after the fact from the settlement of customer, bank, or clearinghouse net payments. This situation would either expose the BoI to potentially large losses, or the payment system to considerable disruption in the event of the failure of a large bank. However, the IMF concluded that the high quality of banking supervision makes the prospect of such a failure very low. (IMF 2001, p. 32) However, there is no further information publicly available as to Israel's compliance with this Principle.
The BoI approaches payment systems issues very much from a supervisory perspective, which does not properly reflect the responsibilities for the payment system that are assumed in the Bank for International Settlement's (BIS) Core Principles. (IMF 2001, p. 56)
In practice, the Bank of Israel has the power to supervise payment systems and settlement arrangements through its Banking Supervision Department. This supervisory ability derives from the Bank of Israel's formal supervisory powers over the banks and the fact that most payment systems are owned by the banks (or considerably influenced by them). However, the Bank of Israel generally avoids exercising its authority in matters connected with the supervision of settlement institutions, and is content to guide them indirectly by means of its representatives on the Banks' Clearing House Committee and the Banking Supervision Department. Thus, in the past the Bank of Israel has initiated the establishment of the automated clearing house as well as important changes in settlement arrangements, for example the transition to same-day settlement. (BIS 2000, pp. 12-13)
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight. |
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In its 2001 assessment, the International Monetary Fund (IMF) found that the payment system in Israel has evolved without any systematic oversight. As a result, each is technically sound but was designed without the core principles in mind. The Bank of Israel (BoI) approaches payment systems issues very much from a supervisory perspective, which does not properly reflect the responsibilities for the payment system that are assumed in the Bank for International Settlement's (BIS) Core Principles. (IMF 2001, pp. 32, 56) However, there is no further information publicly available as to Israel's compliance with this Principle.
In practice, the Bank of Israel has the power to supervise payment systems and settlement arrangements through its Banking Supervision Department. This supervisory ability derives from the Bank of Israel's formal supervisory powers over the banks and the fact that most payment systems are owned by the banks (or considerably influenced by them). However, the Bank of Israel generally avoids exercising its authority in matters connected with the supervision of settlement institutions, and is content to guide them indirectly by means of its representatives on the Banks' Clearing House Committee and the Banking Supervision Department. Thus, in the past the Bank of Israel has initiated the establishment of the automated clearing house as well as important changes in settlement arrangements, for example the transition to same-day settlement. (BIS 2000, pp. 12-13)
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities. |
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In its 2001 assessment, the International Monetary Fund (IMF) found that the payment system in Israel has evolved without any systematic oversight. As a result, each is technically sound but was designed without the core principles in mind. Responsibilities for the operation of various systems are clearly established and defined. Oversight by the Bank of Israel (BoI), however, is not as fully or clearly developed as in most other developed countries. (IMF 2001, p. 32) However, there is no further information publicly available as to Israel's compliance with this Principle.
The Comptroller of the BoI, who has been made explicitly responsible for the oversight of the payment and settlement systems in Israel, has proposed a two-part reform in the payment and settlement system in Israel. The first being, the adaptation of the existing systems to international core principles; and the second, the establishment of a new settlement system of the Real Time Gross Settlement (RTGS) type. The RTGS system, scheduled for activation by the middle of 2007, will permit final same-day clearing by all clearinghouses in Israel and will process all large payments and other urgent payments that will be transferred to it directly, i.e., not via existing clearinghouses. (IMF 2003, p. 6; BoI 2007, pp. 142-143)
Israel