A Look at Innovative Banking- the Bank of Israel’s Recent Success

The international magazine “Central Banking” selected the Bank of Israel as Reserve Manager of the Year 2017, for its breakthroughs in sensitivity analysis of near-optimal portfolios and notable gains from its diversification strategy.

We took a look at their accomplishments with Academic Director of our Banking Innovations and Financial Strategies programme, Dr. Joseph Zelnik, and came to the conclusion that the ability of the bank’s management to think innovatively is at the heart of their success.

The story begins in 2008/9, as the financial crisis was spreading across the globe. Largely thanks to a very conservative and risk-adverse policy, no bank in Israel collapsed and the financial system was largely unaffected. In the years that followed, foreign currency flows were invested in emerging markets, such as Israel and most significantly, natural gas was discovered off its shores. The country found itself, for the first time ever, with large reserves of foreign currency, exceeding 100 billion USD.

In their desire to prevent inflation and plan for future generations, there was a conscious effort to increase foreign exchange reserves, instead of spending them within the “normal” budgetary expenses of the government. The Bank of Israel’s officials knew that putting money in large banks abroad would offer virtually no interest. They decided to introduce some risk by investing in foreign exchange bonds. At first they invested in government bonds and later in large companies. In developing a management model that introduced risks, they also implemented a policy of following the market closely.

“The challenge that they succeeded in,” says Zelnik, “was to introduce calculated risk and innovation without losing safety. They essentially received the prize for their ability to think 'outside of the box' and create new policies adjusted to new conditions.”

Other innovations introduced in recent years include the expansion of digital banking services and the establishment of an entirely digital bank. Both of these developments have increased competition between banks and improved the “small” customer’s ability to negotiate. They have also enabled the development of P2P companies and crowdfunding.

“The Bank of Israel has been innovative in the services the financial system can offer, while remaining conservative in business aspects,” explains Zelnik.

By thinking differently and being willing to try new approaches, the Bank of Israel was able to prevent the shekel from further strengthening in value against the basket of currencies, thus encouraging Israeli export. The Bank’s officials successfully evaluated dangers, enabling the safe introduction of risk, creating an environment that invites healthy innovation.

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Participants of the Banking Innovations and Financial Strategies programme spend an entire day at the Bank of Israel Headquarters and hear from top management on a range of subjects spanning from micro and macro prudential to financial consumer protection. In addition, they visit a leading cyber company and a company that developed a credit decision making system that analyses the customer’s social networking online.