Bank of Israel
| Company type | Central bank |
|---|---|
| Industry | Banking, Finance |
| Founded | 24 August 1954 |
| Headquarters | Jerusalem , Israel |
Area served | Israel |
Key people | Amir Yaron (Governor) |
| Products | Monetary policy, currency issuance, banking supervision, foreign exchange management |
| Website | www |
Bank of Israel
The Bank of Israel (, ) functions as the central bank of Israel, with its main office situated in Kiryat HaMemshala, Jerusalem, and an additional branch located in Tel Aviv. The institution is currently led by Governor Amir Yaron.
Its foremost mission is to uphold price stability and safeguard the robustness of Israel's financial system. The Bank is responsible for formulating and executing monetary policy, managing foreign exchange activities, supervising the banking industry, administering foreign currency reserves, and regulating the infrastructure of financial markets. According to its governing law, it exclusively holds the authority to issue Israeli Shekel currency notes and coins.
By March 2022, the Bank's reserves amounted to roughly US$206 billion (₪664 billion). As of April 2023, the benchmark borrowing rate stood at 4.5%.
Formation and Initial Period
After Israel declared independence in 1948, the task of issuing currency was delegated to the Anglo-Palestine Bank, which became Bank Leumi in 1950, while monetary policy remained under the jurisdiction of the Ministry of Finance. Recognizing the necessity for a dedicated central bank, a committee was established in 1951 that included figures such as Eliezer Kaplan and Levi Eshkol. This group examined central banking frameworks in the United States and sought guidance from United Nations experts with objectives centered on stabilizing the currency and fostering economic development.
Recommendations from specialists called for granting the Bank of Israel autonomy from the Ministry of Finance to prevent political interference, with oversight by a public-sector committee. Nevertheless, the Knesset opted for a governance model featuring a governor-led institution under government supervision, resulting in limited initial independence. The bank was required to support government financing needs but achieved full autonomy over monetary policy only by 2010.
The Bank of Israel was formally established on 24 August 1954, assuming responsibilities for currency issuance and regulatory duties previously held by the Ministry of Finance. Authority over foreign exchange controls shifted to the Bank in 1978, with complete independence attained by 1985. Since 1992, it has directed monetary policy aimed at maintaining inflation within a 1 to 3 percent annual range and has overseen management of Israel’s foreign currency reserves.
Under its inaugural governor, David Horowitz, the Bank consolidated departments related to banknote production and banking supervision transferred from the Ministry of Finance. It expanded its scope to include monetary policy formulation, foreign currency oversight, and economic research divisions. The establishment of the Bank was driven by governmental challenges in regulating credit distribution and supervising a fragmented banking landscape composed of numerous institutions and cooperative societies.
Following its inception, the Bank of Israel played a key role in promoting consolidation within the banking sector by merging smaller cooperative societies into larger banks, thereby improving oversight over credit allocation. Although this was intended to reduce government intervention and market concentration, it paradoxically resulted in heightened government involvement despite initial resistance to creating the bank.
Developments During the 1960s and 1970s
David Horowitz served as governor for seventeen years, guiding the economy through initial periods of stability and rapid expansion. By 1962, however, rising living costs and inflation reaching 9% prompted Finance Minister Levi Eshkol to devalue the Israeli pound significantly—from 1.80 to 3 pounds per dollar—a measure that ultimately failed to resolve fiscal imbalances. Subsequently, austerity measures were adopted by the treasury.
The recession in 1966 compelled the Bank of Israel to revise its policies, notably stepping in to protect depositors after three private banks—Bank Alran, Bank Poalei Agudat Israel, and Bank Credit—collapsed. In 1971, Moshe Zanbar assumed governorship amid high inflation rates (14% in 1972), increased government expenditure following the Six-Day War, and economic difficulties exacerbated by both the Yom Kippur War and global energy crisis. In response to criminal misconduct at Israel-British Bank in 1974, the Bank intervened decisively by removing its management. Arnon Gafni took over as governor in 1976.
1980s: Economic Turmoil and the Introduction of the New Israeli Shekel
When Moshe Mendelbaum assumed office in 1982, Israel was grappling with extreme inflation and the 1983 banking sector crisis, amidst one of the nation’s most severe economic recessions. Inflation soared to a staggering 450% by 1984. To confront these challenges, a National Unity Government was established that same year.
The following year, in 1985, the Economic Stabilization Plan was implemented, developed by treasury officials alongside economists such as Prof. Michael Bruno and Prof. Stanley Fischer. This comprehensive strategy included banning government borrowing from the Bank of Israel to finance deficits, introducing the new shekel by removing three zeros from the old currency, curtailing government expenditures, lowering real wages to enhance export competitiveness, sustaining elevated interest rates, stabilizing the exchange rate, and instituting a temporary freeze on prices. These initiatives effectively brought inflation down to single-digit levels and bolstered the Bank’s institutional authority.
Prof. Michael Bruno took over as governor in 1986. That year also saw an expansion of the Bank’s regulatory authority following recommendations from the Basle Committee. The oversight of foreign currency, which had been transferred from the Ministry of Finance to the Bank in 1978, underwent gradual liberalization until all foreign currency controls were lifted in 2003. The original Department for Supervision of Foreign Currency transformed into the "Department of Market Operations in Foreign Currency," with a focus on market surveillance and economic analysis.
The reforms initiated after 1985 entrenched the Bank of Israel’s independence and strengthened its pivotal role in ensuring economic stability.
21st Century Developments
David Klein became the seventh governor in 2000, advancing monetary reforms through a tight monetary policy framework and facilitating the delegation of salary agreement authority to the Treasury while promoting foreign currency market liberalization. His period in office was marked by escalating tensions between the Bank and Treasury concerning salary negotiations, rooted in the 1985 Basic Budget Law that placed public institutions—including the Bank—under Treasury supervision.
In 2005, Stanley Fischer was appointed as the eighth governor. He sought to introduce new legislation replacing the outdated 1954 Bank of Israel law to better regulate labor relations and implement structural reforms within the institution. During the global financial crisis of 2008, Fischer earned international acclaim for his prompt actions in adjusting interest rates—being among the first worldwide to both reduce and subsequently increase them—accumulating foreign currency reserves, and purchasing government bonds to keep long-term interest rates low. That year also saw a departmental reorganization within the Bank, consolidating or closing several units such as the Foreign Exchange Operations Department and Monetary Department.
By 2010, IMD's World Competitiveness Yearbook ranked the Bank of Israel as the most efficient central bank globally. In March of that year, a new Bank of Israel Law was passed and took effect on June 1, granting full autonomy over policy instruments and decision-making processes. This legislation established a Monetary Committee responsible for interest rate and monetary policy decisions alongside a Supervisory Council charged with approving managerial appointments, thereby aligning governance structures with international financial standards.
Dr. Karnit Flug succeeded as governor in 2013, further enhancing monetary oversight and deepening Israel’s integration into global financial markets. Under Professor Amir Yaron’s leadership from 2018 onwards, the Bank authorized licenses for two new banking institutions: Bank One Zero and Bank Ash Israel.
Buildings
The present headquarters located in Jerusalem, crafted by Arieh Sharon alongside his son Eldar Sharon, secured first place in a 1966 competition and reached completion in 1981. Its distinctive inverted pyramid form draws inspiration from Boston City Hall. Extensive refurbishment took place from 2015 through 2018.
Governors
- David Horowitz, 1954–1971
- Moshe Sanbar, 1971–1976
- Arnon Gafni, 1976–1981
- Moshe Mendelbaum, 1982–1986
- Michael Bruno, 1986–1991
- Jacob A. Frenkel, 1991–2000
- David Klein, 2000–2005
- Stanley Fischer, 2005–2013
- Karnit Flug, 2013–2018
- Nadine Baudot-Trajtenberg, acting governor Nov–Dec 2018
- Amir Yaron, 2018–present