Financial Intermediation and the Transmission Mechanism: Learning from a Case Study on Israeli Banks
22 Pages Posted: 24 Nov 2015
Date Written: November 2015
Abstract
The emergence of institutional investors managing the long-term retirement savings of Israeli households has clearly altered the pattern of financial intermediation in the past decade. Households increasingly hold their savings through these institutions, which in turn provide a growing share of credit to large non-financial businesses. However, Israeli banks are still mainly funded by deposits, but these are less sticky than traditional retail deposits, which have shrunk from 62% to 48% of total deposits. The case study on banks’ intermediation of capital points to friction in the banking sector, particularly where the recent fall in the coverage ratio implies a widening of the gap between deposit and lending rates. This does not unequivocally imply a weakening of the transmission mechanism. Indeed, the increased competition from institutional investors is refocusing banks’ lending to SMEs and households, areas where the oligopolistic nature of the banking system is likely to allow them broader margins. If this is the case, then the transmission mechanism is likely to have become more efficient overall, assuming of course that the corporate bond market and direct credit lending by institutional investors appropriately price the risk involved. A more troublesome finding of the case study is that the financial crisis seems to have had a lingering effect on deposit-lending spreads, beyond the increase in risks and the coverage ratio drop, affecting all borrowers. Thus, unrelated to the transformation of the financial intermediation map, the global financial crisis seems to have weakened the transmission mechanism.
Full publication: What Do New Forms of Finance Mean for EM Central Banks?
Keywords: banks, credit, financial intermediation, transmission mechanism
JEL Classification: E44, E51, G18, G21, G23
Suggested Citation: Suggested Citation