Two years after the passage of the Bachar Reforms — landmark legislation that sought to bring competition to Israel′s financial markets — only half of the recommendations have been implemented, according to a new report.
And while there has been progress in reducing conflicts of interest and decreasing the banking industry′s dominance in the capital markets, some of the most important reform recommendations have yet to be completed, preventing better economic growth, researchers found. The new Koret-Milken Institute Fellows Policy Brief, Beyond Bachar: Next Steps for Financial Reform, evaluates the progress made since the Bachar Reforms were approved by the Knesset two years ago. It found substantial progress in these areas as a result of the approved reforms:
- An increase in overall market capitalization of the private sector as a portion of GDP, rising from 83 percent in 2005 to 101 percent in 2006.
- The emergence of a corporate bond market, rising from 12 percent of GDP in 2005 to 21 percent in 2006 (still small, of course, compared to the United States, where it is 201 percent of GDP, but substantial improvement).
- An increase in the non-bank credit market (measured by corporate bonds as a portion of the total bond market) of nearly 7 percent from 2005 to 2006.
"These are small, important steps, but it′s too early to run victory laps," said Glenn Yago, Director of Capital Studies and head of the Israel Center at the Milken Institute, and a Senior Koret Knesset Fellow. "The Bachar Reforms that have been implemented are impacting the flow of capital in a way that aligns Israeli capital markets with more developed market systems, but there is still a lot of work to be done."
The failure to implement half of the 10 reforms called for in the legislation, as well as other recommendations from the Bachar Banking Reform Committee, has resulted in some of them being undermined by the financial industry.
For example, one of the key goals of reform was to reduce the high concentration of the banking industry in the country′s financial system, which has led to conflicts of interest and fewer choices for investors and businesses. But since the Bachar Reforms were passed, banking concentration has actually increased by 4.23 percent.
"Even though specific recommendations have been implemented, the absence of implementation of others has created a situation where gaps in the reforms have enabled entrenched financial interests to bypass the legislation′s intent to reduce concentration of capital and the lack of competitiveness resulting from conflicts of interests," the report states.
Among the recommendations that still need to be implemented:
- Pass national standards for the sale and repurchase of Repo securities.
- Allow for the development of money market funds.
- Create the ability for banks to securitize and sell their assets, such as loans.
- Establish guidelines on money-market funds, deposit insurance and mutual-fund distribution by non-members of the stock market.
The Bachar Committee, headed by Dr. Joseph Bachar, then-director general of the Ministry of Finance, was created to examine the Israeli Banking System and propose reforms that would further reduce government involvement in the financial markets and promote competition by reducing the grip of the banking industry in all parts of the markets.
The Milken Institute, which has been working for more than a decade with Israeli business and government leaders on ways to reform its financial system, considers such reforms vital to a modern economy. These reforms are necessary to create economic security, independence and growth in Israel′s capital markets.
The report urges ongoing monitoring of Israel′s financial infrastructure to ensure that the means and methods of financing Israel′s future, including the distribution of financial products, are available to the broadest number of entrepreneurs and projects.
Beyond Bachar: Next Steps for Financial Reform is available in Hebrew for free download here. An English translation will be available in August 2007.