The world banking system has been through a lot in the past 5 years of so. Israel, which depends so heavily on external finance to support its start-up economy, has had to dodge through the maze of collapses and constant retrenchments. The question remains, why has the banking system in the Holy Land not joined in the free fall?

A Hebrew interview in yesterday’s with Dudu Zaken, the outgoing inspector of banks, was revealing. As he put it: “We have run simulation models to see what would happen if one of the local tycoons went under, and no bank would collapse.”  For me, that is significant.

The reasons for this strength are many and varied. Start with the fact that when the global credit crisis attacked world markets during 2008, Israel has been there and done that two decades earlier. The lessons had been learnt back then.

Equally importantly, Israel’s central bank has been run until recently by Professor Stanley Fischer, a heavyweight on the international banking scene. He rarely shirked from taking on the top leaders of the major local banks, particularly Bank Hapoalim, if he feared that there was room for poor management and conflicts of interest.

A third part of the picture is the desire of central regulators, both at the Parliamentary level and via the Finance Ministry, to make the world of banking more transparent. While the success here has been limited, progress has been made. For example, over the next few months the minimum for all banks will be clarified and lowered. The types of commissions or charges have been reduced from 300 to 70.

Not all is perfect. As Zaken observed, local banks need to cut their own costs, and his comments were directed at the high wages paid out to the top managers.

About 60 percent of operational expenses at Israeli banks stem from salaries, the most of any country in the Organization for Economic Cooperation and Development after Denmark and compared with an average of 47 percent, Bank of Israel data show. The efficiency ratio of Israeli banks, which measures the effect of operational expenses on revenue, is about 70 percent, the data show. The OECD average is 62 percent.

In addition, Zaken sounded a warning about the lack of opportunity for competition. Five banks dominate 94% of banking activity in Israel.

What next? The Israeli economy is due for some structural changes over the next few years. It would appear that these need to include a more open policy to encourage additional banking players, while not impinging on the successes achieved to date.