ABSTRACT
During the 1950s, the Israeli banking system went through deep structural change. From a highly decentralized banking system, it turned into a centralized system dominated by a small number of large banks that each operated a large branch network. The timing of the process suggests that it is causally linked to the establishment of the Bank of Israel, but so far there has been no definitive examination of the role of the Bank of Israel in the process or its possible motivation. This chapter examines the policies of the Bank of Israel from 1954 to 1959 on the basis of the minutes of its Advisory Board meetings. The chapter argues that during this period a pattern of political economic exchange between the Governor of the Bank of Israel and the large banks emerged: the Governor guaranteed the profitability of the large banks and protected them from competition and, in exchange, the large banks cooperated with the government’s selective credit policy. Furthermore, the chapter refutes the applicability of the “financial repression” thesis concerning the Israeli economy. Rather, it shows that the Bank of Israel was successful in using its powers to create developmental credit that facilitated the allocation of credit to ‘productive’ purposes. However, this success came with a cost, namely, a highly centralized banking system.
