Bank of Israel Unveils Final Framework to Ease Regulations for Small Banks
The Bank of Israel has published the final version of Directive 490, establishing a graduated regulatory framework designed to ease the burden on small and new banks. This move is part of a broader initiative known as the Small Banks Reform, aimed at creating a tiered licensing process that allows financial entities to become banks without facing the heavy regulatory requirements imposed on large banks. The reform intends to enable these smaller banks to attract public deposits, reduce funding costs, offer cheaper credit, and boost competition in the banking sector, particularly for household and small business loans.
The directive divides banks into three categories based on asset size: very small banks with up to 15 billion shekels in assets, medium banks with up to 50 billion shekels (mainly relevant to the three major credit card companies), and large banks subject to full regulation. New banks benefit from a three-year preparation phase, extendable by two years, during which they are temporarily exempt from full capital, liquidity, and compliance requirements to build infrastructure gradually.
Operational relaxations remain, including smaller boards of five directors instead of seven, quarterly full board meetings instead of monthly, and the allowance to combine complex roles such as IT and cybersecurity management to reduce staffing costs. Banks must also maintain a detailed "exit plan" for the first ten years to ensure orderly closure and full repayment to depositors if they fail.
Significant adjustments were made to financial buffers and liquidity requirements to ease market entry. The timeline for meeting full liquidity standards has been extended from three to four years, with a phased approach starting at 60% of the target in the first year. The Bank of Israel also removed a strict two-year deadline for banks granted extended preparation periods and allowed continued use of simpler cash management models up to a 7 billion shekel deposit threshold.
Regarding customer service, new banks in their first three years are exempt from offering standing orders if they provide at least one alternative payment method. Later, customers can set up standing orders directly through regular bank channels, reducing infrastructure burdens. Additionally, small banks are not required to maintain dedicated phone lines for lost or stolen mobile devices but may direct customers to alternative modern communication channels with prior approval from the supervisor.
Key potential users of this framework include the three major credit card companies (Isracard, Max, and CAL), institutional investors like Phoenix Gamma, and international players such as the digital bank Revolut. Bank Supervisor Danny Hachiaushvili previously predicted that at least one foreign entity would receive a banking license in Israel within two years. Initial industry reactions suggest some skepticism about the business model's sustainability under the new rules.
