Israel Capital Market consists of the stocks and bonds traded on the TEL AVIV STOCK EXCHANGE. Israel Securities Authority, a government regulatory body regulates the capital market of Israel. The mandate of the governing body is to protect the interests of the investing public. IPO's are issued and securities are traded on the electronically traded TASE.
Stocks
On this stock exchange, 736 companies are listed. Some of these companies are local corporations while some are international powerhouses such as Teva Pharmaceutical Industries.
Around 1000 stocks with a daily volume of $800 million are traded on the Israeli Stock Exchange.
Bonds
Tel Aviv Stock Exchange has also a liquid and corporate bond market. Israel Government Bonds and corporate debentures include short, mid and long-term fix-rate, variable-rate, and cost-of-living indexed bonds. Daily bond trading volume is $760 million.
Israeli Currency
Trade on Israeli Stock Exchange takes place in Israeli Shekels (NIS), providing the foreign investor currency diversification. Other investment vehicles are foreign currency options, futures and forwards.
Derivative market
Israel belongs to the emerging market economies. Derivative markets in the emerging economies are small as compared to the advanced economies. OTC derivatives are more important in case of the emerging economies.
Derivatives are traded in almost equal proportions over the counter and on the exchange in the emerging economies. Derivatives are used to hedge or speculate on exchange rate and to a lesser extent, equity market risk.
The OTC market in EMEs is dominated by FX derivatives, which account for nearly 90% of total turnover. The interest rate derivatives markets in EMEs are much smaller than the FX markets. The growth of derivatives turnover in emerging markets remains more rapid than in advanced economies.
Foreign Exchange Market
The Bank of Israel holds the foreign exchange reserves to provide liquidity in foreign currency when it is needed, such as to finance the repayments of the country's debt, to pay for exceptional government expenditure on imports at times of emergency, to provide liquidity in a financial crisis, or to be sold as necessary in the course of conducting monetary policy.
The Bank of Israel calculates representative exchange rates once a day on foreign-currency business days only, and makes them available to the general public as a purely informational service.
The average rate in NIS is calculated on the basis of a sampling of exchange rates published by the banks on the Reuters screens, taken at a random moment, which is currently between 13:15 and 15:15 (or between 10:15 and 12:15 on Fridays, holiday eves and some other Jewish holidays).
The representative exchange rate is currently published soon after 15:15 (or soon after 12:15 on Fridays, holiday eves and some other Jewish holidays). The representative rate is calculated from the average of the banks sampled, and excludes values which deviate from the sample average by more than two standard deviations.
The representative rates of the NIS against other currencies are based on the representative rate of the US dollar and the exchange rates of the relevant currencies against the US dollar on the international money markets at the moment the representative rate is determined. The Bank of Israel's Market Operations Department monitors and analyzes current developments in the foreign exchange market, and carries out the Bank's exchange rate policy. Foreign exchange trading takes place primarily between banks and their customers both in Israel and abroad, and between the banks themselves.
Every foreign exchange trading day, the Bank of Israel publishes the representative exchange rates of the shekel against foreign currencies. The representative rate is based on market prices around the time the rate is set.
Insurance Market
Insurance market of Israel is an agency market and the style of operation is different than at the global level. The method of working of the Israel Insurance Industry is such that they are insured for the risks globally also. Many well known insurance brokers have their offices in Israel. There are four major insurance companies in Israel ("Clal", "Migdal", "Harel" and "Phoenix").
Israel market could withstand the subprime global crisis because of its strong Insurance industry. There is a huge and strong competition among the insurance agents in Israel, due to which premium is very less.
Another factor which affects the low insurance rates in Israel is the role of the insurance consultant. In Israel the players in the insurance market are: the insurance company, the agent/agency and the consultant.
PERFORMANCE OF ISRAEL DURING GLOBAL CRISIS
Israel was least affected by the US sub-prime crisis due to its strict regulatory environment of its banks and mortgages. The largest banks of Israel are well maintained, well capitalized and their capital adequacy ratio is much higher than the minimum required Basel standards.
Israeli government had strict norms regarding the minimum down payment on mortgages and so Israeli house owners were not able to default.
The annual growth rate of Israel increased despite the economic run down globally and also expansions were possible.
All the leading multinational companies of Israel did not succumbed to the credit crisis and expanded both domestically and globally.
THE DEVELOPMENT OF CAPITAL MARKETS IN ISRAEL
The reason for our interest in capital market institutions is that a competitive banking environment, particularly in a small country that will tend to have a concentrated banking sector, comes from the robust development of other capital market institutions. Capital market instruments and institutions are the primary source of competition for the banking sector. Development of capital markets and a richer variety of capital market instruments available to the private sector will affect the dominant role of the banks.
In fact, we believe that the under development of the capital markets in Israel is the most significant factor in holding back overall the financial sector and it has a major influence on the lack of competition to the banking sector.
The role of the capital markets is more important than the extent of concentration in the banking sector itself. Non-banks providing banking services and intermediation by capital market institutions are the sources of a competitive financial sector. Development of such institutions does more to foster competition than regulatory restrictions on the activities of the banks that dominate the financial sector.
Capital market institutions have been growing in recent year in many countries with a history of universal banking. In many small European countries non-bank avenues for investments by individuals did not exist until recently.
In recent years, there has been substantial disintermediation in countries like Spain and Belgium resulting in sharp declines in the banks' share of total financial assets and rapid increases in the growth of other financial intermediaries.
In Israel there has not been a similar disintermediation process or any rapid growth in the importance of non-bank intermediaries. The assets of institutional investors (pension funds, insurance companies and provident funds but excluding mutual funds) to GDP declined from 88% in 1990 to 78% in 1996 due to withdrawals from provident funds.
A unique aspect of the Israeli financial structure is that financial intermediaries and institutional investors are mostly bank-controlled entities or bank managed; about 83% of provident funds and 60% of mutual funds are affiliated to the banks. Thus, there is little competitive pressure from disintermediation in the sense seen in other countries.
In countries with well-developed capital markets, banks are only one part of a broad spectrum of institutions that contribute to the process of financial intermediation between investors and savers.
An enterprise's financing arrangements fall along a continuum that starts with the entrepreneur and extends to the large public firm that raises capital in a variety of ways, ranging from the introduction of publicly traded equity to internationally syndicated loans and private placements.
Developed capital markets include many types of financing and different types of institutions that can be summarized into three broad categories:
Entrepreneurial finance - Entrepreneurial financing starts with the efforts of start up to utilize self-financing, e.g., the personal saving of the entrepreneurs' friends and family. It includes government 'incubator' projects and the inter-firm provision of trade credit.
Finally, it culminates with the first of the capital market institutions that we will discuss - the venture capital industry.
Bank lending - Even with fully developed capital markets, banks are the single most important financial institutions. This is often because credit rating by banks and the relationships between firms and their banks are important sources of information to capital markets and other financial institutions.
Capital market financing - There are a wide variety of capital market institutions that take part in the process of financial intermediation. They include non-bank financial institutions such as merchant banks and institutional investors, and both private and public bond and equity markets. Our interest here is the growth of capital market financing in Israel and the absence of some capital market institutions.
As capital markets develop, the banking sector's share of total credit declines for the simple reason that lenders have other places to go. In the last ten years there were some large changes in the sources of funds for Israeli firms.
First, government sources were reduced dramatically and "directed credit" is now relatively small. Second, local stock market (equity) sources have increased in some years, and from 1995 there was a major increase in funds raised by firms in stock markets abroad. Third, in 1999 there was a dramatic increase in venture-capital funds raised, especially for high-tech firms.
Although these trends have increased the forces of competition in the local financial market, banks continue to dominate as the primary source of funds. There is some clear segmentation to the capital markets. Larger firms can go abroad for funds while banks try to dominate the domestic markets. There are some resistances to bank dominance: in some years firms have used the equity markets to raise working capital and recently, the rapidly growing venture capital industry is very important for high tech firms.
Most importantly, there are still some conspicuously absent components to the Israeli capital markets. The absent components are related to another important factor: the involvement of the government with institutional investors that has inhibited the development of capital market institutions and instruments. This involvement enables the banks to retain market power and influence over firms, particularly those without access to foreign sources of financing.
We will briefly examine the major components of the spectrum of capital market sources in order to understand the forces that are competing with the banks and those that can develop in the future.
CURRENT ISSUES IN THE FINANCIAL MARKET
The financial markets are constantly evolving and changing. Some of the issues are yet to be discussed or resolved. These issues have a considerable impact on the global financial market.
Impact of unparalleled change on the global financial system
Global financial system underwent a drastic change due to the various crisis which occurred globally. In September 2008, the collapse of Lehmann Brothers, due to sub-prime mortgage crisis, was the onset of the global financial crisis.
In order to prevent the bankruptcy all over the world, the governments of all the countries started providing support to banks and all the other financial institutions. Central banks played a critical role during the financial crisis. Central banks of different countries are now focusing on preventing such crisis and implementing policies to make that happen.
European Sovereign Debt Crisis
The European sovereign debt crisis began in early 2010 with concerns relating to the rising government deficits, debt levels and the downgrading of European government debt by rating agencies of some countries in Europe including Greece, Italy, Spain and Portugal.
The biggest concern was Greece and the looming possibility that Greece would default on some of its debt and perhaps exit the Euro. The major concern was that this would cause investors to flee other Euro zone countries and the crisis would spread beyond Greece.
Basel III
Basel Committee on Banking Supervision implements the Basel accord. Basel I and II were not useful in case of global crunch so Basel III was introduced.
Basel III basically aims to be helpful during the financial crunches by improving the banking sectors ability to absorb shock arising from financial instability, to strengthen the bank's transparency and also improve risk management and governance.
Capital Raisings
Capital is required by any economy on regular basis to start a new venture or as a working capital or for the expansion. During the crisis there is a substantial increase in the raising of capital by the companies in order to set off their debts and repair their balance sheets.
RECENT TRENDS IN THE GLOBAL FINANCIAL MARKET
The financial markets have become more globalised and advanced due to the recent changes like extensive liberalization of markets, rapid technological process and major advances in telecommunications.
Integration of the financial markets worldwide has lead to the efficient allocation of fund which in turn promotes economic growth and prosperity. Apart from all this there is an increase in securitization in the financial markets. Securitization was made possible due to increase in mergers and acquisitions and leveraged buy-outs that have taken place in the market and also increase in the corporate bond issuance.
Also the continued broadening and expansion of derivatives market are the recent developments. This can be attributed to the rapid advances in technology, financial engineering and risk management which have helped to enhance both the supply of and demand for more complex and sophisticated derivatives products.
While the leveraged nature of derivative instruments poses risks to individual investors, derivatives also provide scope for a more efficient allocation of risks in the economy, which is beneficial for the functioning of financial markets, and hence enhances the conditions for economic growth.
Nobody would deny that financial services play a key role in allocating funds to high-return activities, but the frequency of crisis suggests that only regulated financial markets will yield the best possible outcome. This has important implications both in the advanced financial markets and in emerging markets under pressure to increase financial openness and to promote deregulation.
