“In my term, anyone who wants to run without cash will be able to”


Something was disturbing to the Governor of the Bank of Israel, Professor Amir Yaron, when we arrived at his office on Bank of Israel Street 1 in Jerusalem, and he wanted to close the curtains a little. However, attempts by bank employees to settle the matter do not satisfy Yaron’s wishes, which takes care of the event until the desired result is achieved. This esoteric event marked the way in which the entire interview will be conducted: Yaron, who recently closed a year in office, is very considerate of the messages he seeks to convey and complements his answers fully and at length. Any question that deviates from the path Shiron drew into his internal system before the interview began is blotted out and closes as precisely as the room curtains. Questions that come out of the analytical and comfortable living area are answered with mechanical answers.

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You came to the Bank of Israel as an academic in the US, Professor at the Wharton School of Business at the University of Pennsylvania. What did you see here that surprised you?

“It’s an important, powerful role. If you look at my resume, they are very broad in relation to academia, from the economics of Macro to the kettle’s chopchick in options. However, only when you come to the position of Governor do you understand the wide decline that the Bank of Israel is Alia, the financial advice, the supervision, the payments. It’s hard to appreciate the power of the job until you sit in the chair. ”

When you go to sleep. What’s bothering you?

“Every night there’s something different.”

There has been a lot of criticism about your degree of “Israeli”, it is claimed that you are not connected to the territory. That offended you?

“In this role, I have to know what matters. I’ve always been connected to the state, in all kinds of areas. So in some complexity, I know and know what’s going on here. Of course it’s not like being here 24/7 and intense, but I haven’t come out of nowhere. Israeli “.

Focus on the world of payments

Unlike his previous role as Dr. Karnit Flug, who left the world of payments to the Supervisor of Banks, Yaron himself is very involved in changes in the payment world and the capital market. Among his remarks, even a note of criticism of Israel’s development in the payment worlds emerges, and he also sets a target: “Diagnosis and closing gaps related Technology and adapting the bank to the payments system in the capital market are important tasks. Once we improve the systems, every home and business will be positively affected. In my term, anyone who wants to run without cash but only through digital means certainly can. I see a more advanced financial system, more efficient and fair and cheaper. It also comes with risk management. ”

You set an annual limit on the maximum amount each bank’s payment apps can transfer to businesses. Given that they are approaching the destination quickly, will you be ready to be flexible?

“On the one hand, we tried to incorporate the ability of credit companies to enter the market and be based on it, and on the other we want the market to evolve and adopt the technologies. “I believe that by the end of the year there will be a breakthrough in the payment system and there will be collaborations with large and well-known companies. Therefore, I believe we will not have to deal with the limitation.”

Is there a financial contingency plan for dealing with an epidemic outbreak like the corona virus in Israel? Is it the “Black Swan”?

“This is a medical phenomenon that could affect trade and the economy. The derivative meaning is on the real side, but I have no way of estimating the scale. In the Israeli context, the Bank of Israel’s Financial Stability Report points to some point in the lack of pricing in corporate bonds, and also That name is not dramatic. ”

Governor of the Bank of Israel, Prof. Amir Yaron. Governor of the Bank of Israel, Prof. Amir Yaron. “I don’t want to express my opinion on the market level in one way or another” Photo by Alex Kolomoisky

We are in a cycle that lasts more than 10 years, and some believe that this is distortion. Are you part of the Financial Cyclical School or do you think cyclical needs to be interpreted differently?

“I don’t want to express my opinion on the market level in one way or another. Certainly there are no cycles. But right now, if there is any insight, especially for the next two years, it’s little growth. I would say that it was the issue of the trade war and the barracks that was a concern for – “Tail Event” (the tail events whose probability is 0 or 1) actually here the variance has decreased. In other words, in the most nerdy way I can say: expectancy has decreased but also variance has decreased. We are at this point where the US is still growing. This cycle can continue for a certain period, but to say that there is no cycle? The cycles exist. ”

Mortgage data for the end of 2019 released this week showed an all-time record in mortgage lending. Is the Bank of Israel rethinking the restrictions on mortgages? Are you happy with the way banks are getting into this?

“First of all, it’s important to understand that 20% of this peak is cycles. Part of this is due to a natural phenomenon, because the long-term curve has dropped and mortgage interest rates have dropped. Beyond that, in Israel mortgage credit is about 26% of GNP, that’s a low figure Worldwide. Despite all the highs, you can work on the delta and you can zoom out to the overall level. We are constantly monitoring this. And while those 26% place us in a reasonable relationship between the volume of debt and the value of the collateral and no less than that, the payment in relation to income is one that can be repaid. True, there has been an increase here but the risks in this area are being monitored and we are aware of them and we think they are in reasonable shape. ”

When you took on the role, you talked about securitization as an instrument that would perfect the financial market. What’s up with that?

“Securitization is an important tool, not a new tool. It can be implemented without derivatives on derivatives. We have a lot of insights from the 2008 crisis, designed to ensure that banks take on some of the risk reasonably and with portfolios designed not only for the bad things. Better pricing, and will allow banks to do so Fencing It is better and better of an early repayment fee, which will lead to a reduction in citizenship. I think this is a right tool that needs to be promoted and I hope that you are focused on the new government. “

Now that the markets are bubbling, is this the right timing for securitization?
“On the contrary, now the market is more efficient compared to individual pricing between institutional and bank, if securitization is carried out properly and things are priced right.”

You actually give a lot of credit to banks and institutional bodies who know how to properly price the risk. Even today there are individual transactions.
“I think that once it is a more transparent market, the more likely it is to be priced regularly.”

Budget gap challenge

Yaron was appointed by Netanyahu and as a window who did not want to extend Flug’s tenure and found it difficult to find an agreed candidate. He refrained from criticizing the outgoing government’s decisions, although it is hard to say that they are in line with the bank’s recommendations and worldview.

What are the consequences of a situation where a government will not arise after the next election?
“Our analysis is that if the ongoing budget is throughout the year, we will find ourselves at a deficit of just over 3%. Keep in mind that this is a non-optimal fiscal reduction or convergence in a sense that does not make an economic diagnosis. There is a greater burden of debt and therefore less current expenses “Here, the Accountant General will have to prioritize things the most.”

What does fiscal convergence mean?
There are all kinds of commitments, expenditures, to face every incoming government, even if it is sworn in in June and in a year’s time. These are gaps we have pointed out that the government will have to deal with. And there will be decisions on how to close this budget gap. There is a mix. Certainly one of the things we want to invest in is human capital.

The ceremony of the appointment of Yamir Yaron as Governor of the President's House The ceremony of the appointment of Yamir Yaron as Governor of the President’s House Photo: Kobi Gideon / GPO

“There are big gaps, the budget has fallen in the past and gone up in recent years, so it has more or less reached its peak in the early 2000s. The budget is not yet bombastic per capita when compared to comparison countries, but it has nevertheless gone up and we have not seen any improvement in the scores. Do not necessarily want to put in more money, but first make changes to incentivize young teachers and not seniority, to encourage teachers to go to the periphery. ”

What should the next government do?
Each government chooses where to position itself on the subject of the mix (of spending cuts versus tax hikes – GP and VAT). What is important is to stabilize the debt-to-GDP ratio by around 60%. I do want to give credit, we lowered the debt from just under 100% to 60%, it is a strategic asset of the state. What matters is the route, even if you do not close the one year exception. It is desirable that the route should not take too many years. Our models speak of a 2.5% deficit as one that supports stabilizing the debt-to-GDP ratio around 60%. ”

Your predecessor in the post thought the public system was starving. You may be coming from a school a little different. What do you think?
“There is no doubt that civilian expenditure on GDP in Israel is not high. I don’t like taxes and assume no one likes them, but it’s a matter of government preferences. If I have to read, it’s that the incoming government will continue to see fiscal responsibility before it, stabilizing its debt-to-GDP ratio by around 60%. What’s the mix? It depends on the incoming government. ”

What do you think?
“I think investing at an early age is an important issue. All the new research talks about ‘option on option’ – the path of pedagogical ability and learning. The issue of human capital, the metro and infrastructure. Health is also challenging. The turn of a generation of doctors, the issue of stabilization ( The agreements with the HMOs – GPs and GPOs) that are constantly delayed causing uncertainty.

“On the other hand, the question is what efficiency do big systems have to do. That’s the balance I talk about between the shorter and the longer term. Over the next two years, I would like to see us stabilize the debt-to-GDP ratio and create some fiscal space for investment in infrastructure, human capital and perhaps health. Also lowering regulation and bureaucracy. ”

When you look at the out-of-government activities of the outgoing government, does this coincide with what you learn in economics studies?
“Even if the year ends without a budget, the government will still face challenges following all kinds of structural commitments, and will have to decide how to close this gap. The direct cost of the three election campaigns is about NIS 500 million for the three election days. In the days to come, that’s why it’s not a big deal. I think we’re in a good time and it’s just time to take advantage of this to close the budget gap and preserve growth spending. ”

So what the previous government did was a mistake?
There are two challenges here: closing the fiscal gap and tackling long-term, with investment and growth-supporting budgets. I think the focus on both could have been made much earlier. Until a government emerges and deals with it, with the deficit not necessarily allowing it to invest in growth-supporting causes. All this goes backwards and there is a capitalization formula for this including uncertainty. ”

The inflation regime has proven itself

Global debt is growing at a very high rate, 3 times the GDP, and is only expanding. Do you examine the aspects of the Strom reform that distribute credit to households and examine the route in Israel?
“Speaking of sovereign debt of countries, then there are certainly countries that can afford more than us, which have leading currencies. So I emphasize that we have a strategic asset, which we can afford is different from what the US can afford. Of course, even countries that can afford greater debt need growth that will support long-term debt repayment.

“In Israel, credit to households is 42% -43%, and business credit is about 69%. We are talking about 110% of GDP, and here too we are in a low position relative to the world. God-OECD Found about 150%. This does not mean that they are at the right point, but it is some point of reference. There are various structural elements here. For example, a lot of high-tech that does not require credit and other various reasons that explain the gap, but it is a gap that I am currently exploring, where we are in this rating. “

Your opinion does not seem to rest from the treatment so far at the exchange rate. How do you think it is appropriate to handle it?
“I don’t think the foreign exchange policy, which I talked about at the outset here, has changed. We have all the professional tools, and we are constantly examining what is the same exchange rate that supports price stability, inflation targets and proper economic activity. ”

What is the same gate?
Yaron laughs: “I have used a constructive ambiguity phrase and will continue to use it. But we are inclusive – exporters, importers, consumers and of course real activity versus financial flows. Everything comes into our analysis. As long as the exchange rate does not deviate from the same framework, I prefer that the market do its own, without Intervention If there is a significant deviation, we are not ashamed to interfere.

“In the last year, I have seen two realizations in the same policy framework. The exchange rate framework is also changing. It has concrete aspects of the economy at the moment, incremental growth and forward-looking vision. At the same time, when we think there is a deviation, we are intervening. Where you let the factors in the economy, even if there are changes, digest the changes. ”

And you still can’t get the economy to the inflation target, which ranges from 1% to 3%.
“The inflation target regime has served well and is expected to continue to serve the prosperity of many economies over the past three decades. Even if there has been deviation and failure to meet the long-term target, it is not a reason to change the target. It is not just the Bank of Israel. I sit with Karni, Powell, Christine Lagard, Polos (governors of the central banks of England, USA, Europe and Canada respectively – GP and GPO) and the governors of Europe. This is not a phenomenon that is only in Israel. We look at many of these countries, whose inflation target is 2%.

“The target in itself is important. The players in the economy need a compass – employers, consumers, the capital market. The target defines the rate at which money value will change over time. The Bank of Israel was flexible in containing inflation. There was a growing economy, unemployment that went down and we did not use unusual tools. .

“We set ourselves the goal of examining the whole issue of inflation targets, it’s not a day’s process. The European Bank of Lagard has just begun. We have a structured process here. I expect and hope we will gain insights sometime in mid-2021. Some will be public and some will be internal. Globalization, competition, the ability to buy things on the Internet, the energy market that creates alternatives can be ignored. Want to make a diagnosis whether there have been permanent changes or not, and look at what they mean Of all the inflation target.

“In view of the tight labor market, we have seen that goal support is more effective in intervening in the foreign exchange market than the transversal tool which is the interest rate. We are constantly on it. But the economy is working well. The market is tight and doesn’t seem to be tightening. ”

Is a negative interest rate tool something you consider if inflation does not progress?
“We have a full toolbox that includes, among other things, the things you talk about. We constantly refresh it with things that have been tried here, and with things that haven’t been tried here. Our inflation target is flexible. That’s for good reasons. ”

And negative interest rates?
“These are not tools you would like to reach, but everything is in the toolbox at the potential level, the right case, the right assistance and the right time if they need it.”

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