Developments in the Israeli Capital Market, 1995-2017: Toward an Efficient Financial Intermediation

The last twenty years in Israel have given rise to dramatic economic developments with special focus on financial markets. Such developments have become feasible due to changing macro-economy paradigms following the 1983 crisis in the Israeli banking system. A prominent paradigm shift evolved around the diminishing role of the government in financial markets. The period we survey in this chapter is characterized by continuing this trajectory. In addition, the surveyed period has promoted structural reforms attempting to: (i) diminish the overwhelming banks’ controlling power, (ii) form an off-bank credit market, (iii) break the centralized controlling structure in the economy, and (iv) mitigate the conflict of interests between major and minor holders in public companies. Moreover, the local economy has widely been opened up to the global environment. Major steps include the adoption of international norms in financial reporting and corporate governance, the full liberalization in the foreign currency market, and the adoption of an equal taxation among financial investments. We examine all these structural reforms and their outcomes on the Israeli financial markets and present the upcoming reforms in the retail credit market.