Never before had a non-Israeli been appointed governor of the Bank of Israel. Stanley Fischer, former first deputy managing director of the IMF, is a first.
Mr Fischer, the Zambia-born, previous vice-chairman of Citibank, surprised everyone when he accepted the post in January 2005. Before starting in May, he spent time becoming proficient in Hebrew. In post, he has already worked with two prime ministers (Ariel Sharon and Ehud Olmert) and three finance ministers (Benjamin Netanyahu, Mr Olmert and Avraham Hirshenzon) to try to prevent financial tremors in the wake of Mr Sharon’s sudden illness and the general elections.
Even before Mr Fischer officially began his tenure, heads of the major domestic banks lobbied him to oppose the largest financial reform in Israel’s history (the Becher reform), which sought to divest the banks of their provident funds and mutual funds and sell them to financial institutions, such as insurance companies and US investment funds. However, the new governor did not surrender to the pressures, but rather favoured the reform.
Standing firm
Recently, the banks have pressured Mr Fischer to allow them to sell insurance policies in addition to pension plans at bank branches. Not only that, the banks want to be allowed to acquire controlling stakes in insurance firms. Mr Fischer has rejected this and believes the banks will be unable to assume ownership of insurers for the next 10 years at least.
Just a few months after taking up his post, Mr Fischer was drawn into an inherited labour dispute with Bank of Israel employees. He promptly appointed a director general and personnel administrators to resolve the dispute. Meanwhile, the state comptroller published a scathing report criticising the excessive salaries and benefits – running into millions of dollars – paid to senior bank executives. For example: six bank executives received retirement benefits to the tune of hundreds of thousands of dollars; employees appointed as board members automatically received 40 years’ seniority; and employees received loans at subsidised interest rates.
The state comptroller criticised the lack of control over the bank’s budget, which is determined by the bank itself. Previous management took advantage of this budgetary freedom to grant employees excessive wage benefits.
Mr Fischer was publicly attacked for the wages scandal, even though it was not of his making. He immediately cancelled excessive benefits, changed the payroll system and transferred the status of board members to that of holders of personal contracts customary in the public sector.
He also persuaded Mr Sharon to abandon plans to distribute free Bank Leumi options to the public. Instead, Mr Sharon opted for Mr Fischer’s proposal to sell Bank Leumi’s controlling stake by publishing a tender or by distributing share packages to investors.
Another task that Mr Fischer has been working on is the Bank of Israel Law, which replaces the one enacted in 1954. Unlike his predecessors, Mr Fischer received an explicit promise that the bank would be run in accordance with the new law.
Q What effect will Warren Buffet’s acquisition of metalworking toolmaker Iscar have on the Israeli economy?
A This will have a positive effect on the Israeli economy. We have, in effect, received considerable amounts of foreign investment in recent years – mostly in the high-tech sector but also in the privatisation of the banks. But this approach to an Israeli company that uses high tech in its manufacturing process but is not producing a high-tech output is a significant move. This is independent of the fact that Warren Buffet made his first non-American acquisition in buying Iscar. These things will have a positive effect on the outside image of Israel’s economy, which is in any case improving significantly.
Q Will the deal influence international banking groups to buy Israeli banks?
A Three international banks are here doing corporate business and the investment banks are here. We would really like to have some foreign bank participating in retail because it would be good for Israeli banks to have that bit of competition added to the system. But I doubt that the Warren Buffet acquisition of Iscar will affect the decisions of international banks significantly.
Q How do you regard the globalisation trend among Israeli banks?
A I think it is a very natural move, particularly for our two biggest banks – Hapoalim and Leumi can basically not expand very much in Israel. Each of them has about 30% of the banking market and we wouldn’t want them to get much bigger in the domestic market. They are good business people and, like all good business people, they want more exposure and participation in the international economy. It is very natural that they want to go abroad partly to facilitate business with Israeli companies but also as part of the general global diversification of Israeli firms.
Q Is the Israeli economy progressing as you expected?
A I was fortunate enough to arrive in Israel when the economy was demonstrating impressive growth.
I found an improvement in the fiscal economy, and a major reform process was taking place. The most impressive thing is that, despite all the political changes, including the change of finance ministers, this process has continued. It is not only convincing Israelis that it will continue, but it is also convincing foreigners that it is happening.
We see this in a small way in Moodys’ decision to reverse [Israel’s rating] from neutral to positive. In my discussions with the government, everybody agrees that there are social problems that need to be dealt with. Nobody thinks that we can solve them by breaking the fundamentals of fiscal and monetary policy.
Q Were you surprised by the inheritance you received when stepping into the post of governor of the Bank of Israel?
A Yes and no. I was not surprised at the high professional level of most of the people who deal with policy and research at the bank. I think Israeli monetary policy making, while not perfect, has been good for some time and is one that operates at a high level, similar to the management of the reserves, and the same goes for our research department. This is a bank with excellent professionals that I knew.
I also expected that I would have to deal with significant labour problems, where I encountered positive and negative surprises.
The positive surprise was that that it was possible to end the labour dispute. For instance, in the Bank of Israel there were work sanctions when I arrived. It was possible to end them within a few months and we basically moved closely to an agreement with the workers’ union. We did this some months ago.
I was negatively surprised to discover some of the elements of previous wage agreements in the bank and by some of the management, which were exposed by public reports, including the state comptroller’s report. These matters have to be dealt with and the fact that these were negative surprises contributed to it taking longer than I had hoped to put this episode behind us.
Q Will the new Bank of Israel Law be based on the law of the Bank of England or the US Federal Reserve?
A I think we are closer to the Bank of England than anything else, both in having a monetary policy council with outside members and in having a management board as a board of directors. In that regard, the structure will closely mirror the structure of the Bank of England.
Q Will this law emphasise the independence of the Bank of Israel?
A No doubt there will be a foreword to the Law, which will emphasise that it simply defines the parameters in which the bank will work and it should ensure independence, particularly by defining the goals of the bank. These are very similar to those of modern central banks, where price stability is defined by the government and not by the central bank.
Q What internal changes are you planning at the bank?
A Internal changes will include reorganisation of all the departments associated with monetary policy. We are likely to combine all the operational parts of the monetary policy and the reserve management associated with domestic transactions into one operational department and create a separate financial department.
In other central banks this is called financial stability but, because Israel does not only have financial stability to worry about but also development of the financial market (which has a considerable way to go), I prefer to call it a financial department that will deal with reforms and stability. It will also have the task of following up on developments in the financial markets.
So they will be part of the policy-making process, because whenever we reach a policy decision we have to take into account the situation in the financial markets. We will also be setting up a statistics department where each department keeps its statistics to make them more accessible to all the departments and to the general public.
Q What are your goals for the coming year?
A There is an old saying in economics that you should forecast something or a date, but not both. But I will accept your challenge. I would like to get this labour dispute behind us. We have agreed to the approach whereby we have changed the entire wage structure. We need to get that in place and start working on the implementation of the new Bank of Israel Law, which will effect major changes in the bank. It will open us up because we will have outsiders on the monetary policy committee.
This month, we have published our first minutes of the monetary committee discussions, and we will continue to exercise transparency in terms of our monetary policy decisions. On the management side, we intend to publish more information on the budget, wage agreements and other publications of interest to the public and the government.
Q How do you want to leave the Bank of Israel in four years time?
A I ask myself the same question. I inherited a bank that does very well handling monetary policy and things essential to the Central Bank, but operates under antiquated laws and with an antiquated management structure. We must recognise that even an independent central bank has to be accountable to the government and the public in its actions. So the single most important thing to me is to be able to say that I contributed to the growth and strengthening of the Israeli economy through the Bank of Israel.
On the organisational side, it is necessary to transform the bank into a modern structure – one that is highly professional.
