This Selected Issues paper examines the housing market in Israel. Property prices in Israel are currently about 25 percent above their equilibrium value, owing largely to low mortgage interest rates and supply shortages. Price-to-income and price-to-rent ratios are well above their equilibrium value. The risk of a sharp correction in housing prices—although mitigated by the supply shortages—remains a concern and could have important macro-financial implications. To contain such risks, macroprudential policies should be further tightened. At the same time, concerted efforts should be made to alleviate supply-side constraints.


This Selected Issues paper examines the housing market in Israel. Property prices in Israel are currently about 25 percent above their equilibrium value, owing largely to low mortgage interest rates and supply shortages. Price-to-income and price-to-rent ratios are well above their equilibrium value. The risk of a sharp correction in housing prices—although mitigated by the supply shortages—remains a concern and could have important macro-financial implications. To contain such risks, macroprudential policies should be further tightened. At the same time, concerted efforts should be made to alleviate supply-side constraints.

Developing an Effective Macroprudential Policy Institution in Israel1

1. Extensive work has been in progress towards establishing a Financial Stability Committee (FSC) focusing on macroprudential policy in Israel. However, a consensus is yet to be reached on how best the FSC should be set up, as views differ among the relevant stakeholders. This note draws upon recent work by the Fund (IMF, 2011 and 2013) to discuss possible options for an institutional model in Israel that would best ensure the effectiveness of macroprudential policymaking.

A. Context

2. The Israeli banking system has weathered the global financial crisis relatively well.2 Israeli banks proved resilient to global financial shocks, reflecting their prudent funding and lending practices and limited exposures to “toxic” structured assets, underpinned by the conservative and intrusive style of bank supervision by the Bank of Israel (BoI).

3. However, the non-bank financial sector was hit hard by the global financial market turmoil. Pension and provident funds, insurance companies, and mutual funds, all suffered heavily as portfolios lost value and investors withdrew funds, even as corporate bond markets froze during the second half of 2008. In response, the authorities introduced various crisis intervention measures. To some extent, the poor performance of the non-bank financial sector may be traced to their rapid growth in the pre-crisis years, notably in the context of oversight that lagged fast-paced financial innovation. But it also reflected insufficient understanding about how risks in the financial system accumulate and how they affect and interact with the rest of the economy.

4. The authorities recognize that simply ensuring the stability of individual financial institutions or markets is not sufficient, and that an integrated approach is required for the financial system as a whole, focusing in particular on macro-financial feedback loops (BoI, 2011). Against this backdrop, the FSAP Update in 2012 recommended that an FSC in charge of macroprudential oversight be formally established, led by the BoI and comprising of all the relevant regulatory agencies and the MoF (Box 1, and IMF, 2012 a and b).

2012 FSAP Update—Key Recommendations on Establishing the FSC

  • Establish more formally a standing national FSC charged with macroprudential oversight. The FSC should be chaired by the BoI and be comprised of all the relevant agencies, including the Ministry of Finance.

  • The area of responsibilities of the FSC should be clearly delineated vis-à-vis a crisis management committee.

  • The mandate and functions of the FSC should include the monitoring of the sources of systemic risk and the establishment of a policy agenda to mitigate such risks.

  • To ensure accountability, the framework should aim to communicate major policy decisions and charge policymakers with undertaking cost-benefit and risks analyses when deciding on actions to be taken.

  • The FSC should aim to work by consensus. If this would render the FSC indecisive, a more robust decision making procedure should be put in place.

  • Adopt a “comply or explain rule,” or make the decision of the FSC binding on the member agencies.

  • Joint publication such as a Financial Stability report could be used as a vehicle for communication of key messages to the general public.

B. Progress in Setting Up A New Macroprudential Authority

5. Financial supervision responsibilities in Israel are shared among several agencies. The BoI supervises banks and is responsible for the oversight of the payments system. The Israeli Securities Authority (ISA) oversees the securities sector, while the Capital Markets, Insurance, and Savings Division (CMISD) at the MOF is responsible for the oversight of the insurance and pension sector. Among these agencies, only the BoI has the statutory mandate of financial stability.

6. Over the past few years, the authorities have made significant efforts to strengthen macroprudential oversight. A Financial Stability Group consisting of representatives from the three supervisory agencies was set up in mid-2011, which has since met periodically and produced internal reports for the BoI Monetary Committee and the other supervisory agencies.

7. The authorities are committed to going further and are preparing draft legislation to establish an FSC. At present, there is a broad consensus that: (i) the FSC shall be represented by the BOI, the CMISD, the ISA, and the MOF; (ii) the FSC’s functions should include the identification, assessment, and monitoring of systemic risks, and promote information sharing; and (iii) the FSC should not have direct policy tools but only have “soft powers,” such as issuing warnings and making recommendations on remedial measures, similar to the macroprudential policy frameworks for the European System Risk Board (ESRB) and for the German Financial Stability Committee. The structure for micro prudential supervision will remain intact. Those elements are consistent with the 2012 FSAP Update recommendations.

8. However, there is lack of consensus on several other elements of the FSC’s institutional framework, especially on: (i) whether a macroprudential committee should be established separately from a crisis management committee; and (ii) which institution, the BoI or the MoF, should take the lead.

  • The BoI’s view is that the FSC focus on macroprudential policies in normal times, consistent with the FSAP Update recommendations. Given that the central bank: (i) is well respected as an autonomous policymaking institution in Israel; (ii) has established strong expertise in the analysis of macroeconomic and financial developments; and (iii) has the responsibility of supervising the banking system and the payment system, it is argued that the BoI should be given the lead role, with the Governor serving as the chairperson. At the same time, a separate crisis management committee should be set up, with Finance Minister chairing the committee.

  • The MoF is, however, opposed to the BoI’s view. Given that there is likely to be an overlap of members in the macroprudential and crisis management committees, the MoF favors the establishment of a single committee. It views that a “single” FSC would contribute better to ensuring a smooth coordination and transition from normal to crisis times. Furthermore, because the committee would need to engage extensively in inter-government agency coordination, and crisis management could involve the use of taxpayers’ money, it is viewed that the Finance Minister should chair such a committee.

9. Meanwhile, the ISA is concerned about voting and information sharing arrangements in a FSC. It argues that a simple majority voting rule may not always reflect appropriately an expert’s view, most importantly a view of regulators which own micro supervisory tools for macroprudential policy implementation. Thus, it argues that voting rules should include a veto option. In addition, the ISA raises concern that a market regulator (like the ISA) and an institutional regulator (like the BoI) tend to have a different approach about how to handle market sensitive information. The former favors full and timely disclosure of information, while the latter tends to be cautious especially if disclosure could potentially cause a market panic and trigger a systemic crisis. This “cultural gap” would not be easily solved.

C. Assessment of the Two Proposed Models

10. There is no one-size-fit-all model. While there is a general consensus that central banks should play a leading role given their expertise in macro-financial analysis (IMF, 2010 and ESRB, 2012), the choice of a specific institutional set-up may depend on individual country circumstances, notably pertaining to the financial structure, regulatory architecture, and historical and political factors.

11. This said a strong macroprudential authority should have following abilities; (i) effectively identify, analyze, and monitor systemic risks; (ii) make timely and effective use of macroprudential tools; and (iii) make coordination among responsible agencies effective in risk assessment, while preserving their individual autonomy (IMF 2011, and Nier et al, 2011). Based on these established criteria, the comparative strengths and weaknesses of the two proposed models (the BoI preferred model and MoF preferred model) are discussed below (Table 1 and Annex 1).

Table 1.

Strengths and Weaknesses of the Proposed FSC Models

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Sources: IMF (2011) and Nier et al. (2011).

12. Both models have common strengths with respect to the first criterion, “effective identification, analysis, and monitoring.” Because both models have a dedicated macroprudential committee—where regulators get together, bring information, and discuss macroprudential policies—they would have relative strengths in accessing information and using resources and expertise efficiently, especially compared to “decentralized (no committee) models.” The committee structure can avoid “group think,” a potential risk involved if the central bank alone is entrusted with macroprudential policy powers (“fully integrated central bank model”).

However, on the other two criteria, “timely and effective use of policy tools,” and “effective coordination across policies,” comparative strengths and weaknesses are different.

Strengths and weaknesses of the BoI preferred model

13. By establishing a FSC solely focusing on macroprudential policy, the BoI can naturally take the lead role, with the Governor serving as the chairperson. The role of the MoF could be more passive.

  • With a single mandate on macroprudential policy, the committee’s size could be smaller, facilitating the process of decision making. Alongside, with the FSC given the clear (single) mandate of macroprudential policy, this model could more effectively assure accountability.

  • By giving the central bank the lead role, the FSC could piggyback on the autonomy of the central bank. A high degree of autonomy is beneficial, akin to the case of monetary policy, particularly because macroprudential policy decisions can be unpopular politically, and alongside, expert knowledge is important (Ingves, 2013).

  • This model can better facilitate coordination with monetary policy and bank supervision, and effectively utilize the central bank’s analytical capacity and resources. Central banks, in general, are considered to have strong institutional incentives to ensure the effectiveness of macroprudential policies, because, if macroprudential policies are ineffective, this could complicate monetary policy, or in the event of a crisis, lead to costly crisis management in the banking sector (IMF, 2011). Given the central bank’s strong incentives, this model would help ensuring the committee’s willingness to act.

  • Open and broad discussions can be promoted by including non-executive experts in the membership, as in the case of US and UK frameworks. These experts would likely not have a conflict of interest and neither would they impinge on the autonomy of the central bank and other regulators. They would enhance the quality of the deliberations, without being prejudiced towards excessive regulations. Accordingly, this model would contribute to ensuring a balanced judgment and enhancing the legitimacy of the FSC’s decision.

14. A potential drawback of this model is that given that the role of the MoF is relatively small, the MoF’s motivation to cooperate may diminish. For example, the scope of enlarging the macroprudential toolkit to include, for example tax policies, could be more limited. There could also be a limitation on enacting new legislation, for example, to introduce new macroprudential powers or to expand the perimeter of regulation.

Strengths and weaknesses of the MoF preferred model

15. The active presence of the MoF, with the Finance Minister serving as the chairperson, would help bolstering the scope of macroprudential policies, if necessary. The MoF is also better positioned to coordinate actions by a broader set of government agencies. For example, the FSC could more effectively influence relevant government agencies to take action to address the problem of housing shortages (which has in part contributed to surge in house prices in recent years). Furthermore, coordination between macroprudential and fiscal policies (in particular, tax measures) would be enhanced.

16. However, there are several disadvantages.

  • Because the role of the MoF is strong, there is risk that short-term political considerations could prevail over prescient macroprudential considerations. This risk is not trivial, especially because senior MoF staff positions, including that of the Minister, have been subject to quite frequent changes (for example, over the last 10 years, seven ministers have served).

  • The model could put at risk the autonomy of the regulators and the BOI, particularly given that the MoF has strong influence over personnel management in the appointment process of the heads of the BoI, ISA, and CMISD.

  • As an option, to protect the autonomy of the central bank, the BoI could be given a veto power, as in the case of German framework. However, this could potentially undermine the timeliness of decision making.

  • Given that the FSC has dual functions of macroprudential policy and crisis management, the size of the committee could become larger, as several other agencies important for crisis management operations, such as the Prime Minister Office and the Accountant General’s Division at the MoF (though they are less relevant for macroprudential policy), may want to, rightly, participate. The larger size of the committee would make a decision making process complex, undermining the timely and effective use of macroprudential policy tools. Alongside, with many agencies involved, the committee may face communication challenges, weakening its accountability.

On balance, the BoI preferred model appears to better contribute to strengthening overall macroprudential oversight, while preserving the integrity of the existing regulatory framework in Israel.

17. The main functions of a crisis management committee are different from that of a macroprudential committee (Table 2). Most importantly, a macroprudential committee has an active policy setting and implementation role and is given macroprudential tools (such as “warnings” and “recommendations”). In contrast, the crisis management committee is more of a coordination mechanism for relevant government agencies. Besides, macroprudential policy and crisis management reside in different policy areas, and thus the approach to accomplish their respective mandates could be different. Especially, macroprudential policy can be characterized by an open discussion where all relevant expertise be effectively utilized and where different views are debated. In contrast, the approach to crisis management should be more practical and pragmatic.

Table 2.

Conceptual Comparisons—Main Features Of A Macroprudential Committee and A Crisis Management Committee

(A General Case and Not Specific to Israel)

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19. Several countries have considered setting up a macroprudential authority purely focusing on macroprudential policy. In Sweden, the Swedish Financial Crisis Committee—an independent committee appointed by the government to examine the Swedish legal framework on crisis management—recommended that a macroprudential council be established separately from the existing Stability Council, which focuses on crisis management and is chaired by the Finance Minister (Government Office of Sweden, 2013). In the UK, the Financial Policy Committee at the Bank of England is not explicitly mandated to manage crises, because “the demands of crisis management–in terms of players, tools, priorities and timescales–differ, in some cases significantly, from those relevant in peacetime” (Clark, 2012).

20. The bottom line is that the BoI preferred model seems to have more merits than the MoF preferred model. First, the committee’s membership could be kept at a reasonably small size, while non-executive experts could be involved. Second, by giving the BoI the lead role and the chairmanship, this model would better exploit the central bank’s incentives to act and efficiently mobilize its resources. Third, the role of the BoI and MoF can be clearly separated, thus better aligning their comparative expertise with their respective responsibility, and contributing to preserving the autonomy of each regulator and the BoI.

D. Additional consideration

The voting arrangements and transparency and accountability arrangements would also be crucial elements for the effectiveness conduct of macroprudential policy.

21. On voting arrangements, in principle, the FSC should aim to work by consensus. However, disagreements could emerge and persist, delaying policy action, and thus a voting rule is needed. Voting, in general, should be subject to a simple majority or a qualified majority rule, rather than a unanimity rule. This would help reduce the scope for a single committee member to block a policy decision or the risk that no action is taken as a result of persistent disagreement between member agencies. To address ISA’s concern, depending on the significance of the matter to decide, the FSC could have a choice to use either a simple majority rule or a quailed majority rule—for example, a qualified rule could be used for making a recommendation on specific remedial measures or making a recommendation public (as in the case of the ESRB).

22. The FSC should be able to use “warning” and “recommendations” flexibly depending on circumstances.3 However, to protect the integrity of the autonomy of micro-prudential regulators. some safeguarding mechanisms need to be considered. Most importantly, “recommendations” should not be made with respect to individual institutions (as in the case of the UK’s framework). Furthermore, the FSC’s recommendations should be of a general, rather than overly specific, nature, not conflict with supervisory objectives, and be confined to areas where a recipient of “recommendations” already have legal powers to take action.

23. Finally, appropriate accountability requirements would be clearly instituted to enhance the FSC’s willingness to act. In particular, they can help counter biases in favor of inaction or insufficient action, particularly given that macroprudential policy decisions would be susceptible to lobbying of the financial industry or political pressures. Accountability arrangements also help the public understand the objectives of the committee and judge its performance against these objectives. Following options could be considered.

  • Publish a record of meetings (which is different from the publication of full minutes). This is useful to inform the public of issues discussed and the major deliberations, which led to the FSC’s decision.

  • Publish a policy strategy paper. This is useful to guide the public’s expectations as to how and when the FSC will use its policy tools and to achieve accountability for macroprudential policy.

  • Publish an annual report and a financial stability report. This would help enhance greater public awareness of the activities of the FSC. In the US and Germany, macroprudential authorities are required to publish such reports by law. Separately, the FSC could publish its own financial stability report.

Appendix I. Stylized Models for Macroprudential Policy

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Source: IMF (2011).


  • Bank of Israel, 2011, “Israel and the Global Crisis 2007–09,” September.

  • Clark, Alastair, 2012, “What is the FPC for?Speech at the Society of Business Economists Annual Conference, May.

  • European Systemic Risk Board, 2012, “The Macroprudential Mandate of National Authorities,” March.

  • FSB, IMF, and BIS, 2011, “Macroprudential Tools and Frameworks,” Update to G-20 Financial Ministers and Central Bank Governors, February

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  • Government Office of Sweden, 2013, “Preventing and Managing Financial Crises,” January.

  • Ingves, Stefan, 2013, “The role of the central bank after the financial crisis–the challenges ahead,” speech to the Swedish Economics Association, Stockholm, June.

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  • International Monetary Fund, 2011, Macroprudential Policy: An Organizing Framework

  • International Monetary Fund, 2012a, “Israel: Financial System Stability Assessment,” IMF Country Report No. 12/69, August 2012.

  • International Monetary Fund, 2012b, “Israel: Technical Note on Crisis Prevention and Management Financial System Stability Assessment,” IMF Country Report No. 12/304, November 2012.

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  • International Monetary Fund, 2013, “Key Aspects of Macroprudential Policy,” IMF SM/13/1450, June 2013.

  • Nier, E.W., J. Osiński, L. Jácome, and P. Madrid, 2011, “Institutional Models for Macroprudential Policy,” IMF Staff Discussion Note, SDN/11/18, November 2011.

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  • Nier, E.W., J. Osiński, L. Jácome, and P. Madrid, 2011, “Toward Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Modes,” IMF Working Paper, WP11/250, November 2011.

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Prepared by Kotaro Ishi.


The financial system’s assets are equivalent to 2.5 times GDP, evenly divided between banks and non-banks. Over the past few years, the non-banking sector grew relatively strongly from 100 percent of GDP in 2008 to 120 percent of GDP in 2012, whereas the banking sector shrank from 130 percent of GDP to 120 percent of GDP during the same period.


“Warnings” would be appropriate when the FSC addresses the legislature, the market, or the public at large, or raises concern to the government about broader macroeconomic imbalances. “Recommendations” would be effective to influence specific regulatory actions by each regulatory agency, and its effectiveness could be enhanced with “comply or explain” mechanisms attached.