Bank of Israel Law

The Bank of Israel Law is the law under which the Bank of Israel operates. In August 1954, the Knesset approved the Bank of Israel Law, 5714–1954, and the law came into effect on December 1, 1954, considered the founding day of the bank. On March 16, 2010, the Knesset approved the Bank of Israel Law, 5770–2010, which replaced the previous law, and it came into effect on June 1, 2010.

The law established the creation of the Bank of Israel, whose duties are "to manage, regulate, and direct the currency system, as well as to regulate and direct the credit and banking system in Israel, in accordance with the economic policy of the government and the provisions of this law, in order to promote by monetary means:^[1][2][3]

(1) The stabilization of the value of the currency in Israel and abroad;

(2) A high level of production, employment, national income, and capital investment in Israel." (Section 3 of the law)

This provision grants the Bank authority in the monetary field, but it obligates it to act in accordance with the government's economic policy, thereby limiting its autonomy. The bank was established as the central financial authority in the country.^[4]

The law stipulates that the head of the bank is the governor, appointed by the President of the State upon the recommendation of the government for a term of five years, with the possibility of extension. The governor manages the bank and serves as an advisor to the government on currency and other economic matters. The government, consulting with the governor, also appoints one or two deputy governors. The law sets the conditions for the suspension of the governor and the deputy governor.^[5][6][7]

The government appoints an advisory committee to the bank, consisting of no more than eleven members, chaired by a chairman and vice-chairman. Additionally, the government appoints an advisory council, composed of the committee members and ten additional members. The committee and the council advise the governor (but do not have the authority to make binding decisions for the governor), and the governor is required to attend their meetings.^[5][6][7]

The Bank of Israel has exclusive authority to issue currency, which is legal tender in Israel, in an amount determined by the governor.

The bank is allowed to acquire, hold, and transfer gold, foreign currency, and securities of foreign governments. The bank regulates the banking credit and has the authority to determine the liquidity of banks.

Upon its entry into force, the following laws were repealed:

Bank Notes Ordinance, 5708-1948 Currency Ordinance, 5708–1948, except Sections 1 and 2 therein Small Coins Ordinance, 5709–1948

As part of the 1985 Economic Stabilization Plan, Section 45 was amended, and Section 45A was added to the Bank of Israel Law.^[8] According to the amendment (in contrast to the policy followed by other central banks worldwide such as the Federal Reserve), the Bank of Israel is prohibited from printing money to finance government expenditures. Prior to the amendment, the government initiated and obligated the bank to do so.^[9] This significant amendment increased the autonomy of the Bank of Israel as the planner of Israel's monetary policy.^[10]

In the 1990s, two committees operated to examine the Bank of Israel Law: a public committee led by Professor Tzvi Zisman (formerly the Deputy Governor) during Yitzhak Rabin's tenure,^[11] and an internal committee of the Bank of Israel, led by Dr. David Klein.^[12]

In December 1997, Prime Minister Benjamin Netanyahu, following an initiative by Governor Jacob Frenkel, appointed the Committee for Examining the Bank of Israel Law, chaired by Supreme Court Justice Dov Levin, with its members being Professor Chaim Ben-Shachar from Tel Aviv University, former Governor of the Bank of Israel Arnon Gafni, Chairman of the Advisory Council Shlomo Lorincz, former Deputy Minister of Finance Ezekiel Flumin, Professor Alex Zuckerman from Tel Aviv University, and attorney Yaakov Rubin.^[13] The committee submitted its recommendations to the government in December 1998.^[14][15]

In the law, which was approved within six weeks of its submission, the objectives of the bank were redefined as follows:

(1) To maintain price stability, as a central goal. The price stability area is determined by the government, in consultation with the Governor.

(2) To support other goals of the government's economic policy, especially growth, employment, and reducing social disparities, provided that, according to the Monetary Committee of the Bank, this does not undermine the achievement of price stability over time. For this purpose, "price stability over time" means a state where the committee anticipates, based on the monetary policy it has set, that the inflation rate will be within the defined price stability range for a period not exceeding two years. (3) To support the stability of the financial system and its orderly functioning.

(3) To support the stability of the financial system and its orderly functioning.

The law also specifies the roles of the bank:

(1) To conduct monetary policy.

(2) To hold and manage the country's foreign currency reserves.

(3) To support the orderly operation of the foreign currency market in Israel.

(4) To serve as the government's banker.

(5) To regulate payment and settlement systems in the economy, aiming to ensure their efficiency and stability, including in accordance with the Payment Systems Law, 5778-2008.

(6) To issue currency, regulate the cash system in the economy, and guide it.

(7) To supervise and regulate the banking system within its authorities under banking laws and any other law.

The law emphasizes the bank's independence: "The Bank shall be independent in choosing its actions and exercising its powers for the purpose of achieving its objectives and fulfilling its duties" (Section 5 of the law).

The law states that the head of the bank is the Governor, appointed by the President of the State upon the recommendation of the government for a period of five years, with the possibility of extension for only one additional period. The Governor manages the bank and serves as an economic advisor to the government, particularly regarding reducing social disparities and income inequality in society. The government, upon the Governor's recommendation, may also appoint a Deputy Governor. The law sets the conditions for the dismissal of the Governor and Deputy Governor.