ABSTRACT

Mainstream economic theories assume that the role of monetary and financial governing institutions is to maintain the performance and stability of the banking and financial system. In late-developing countries the monetary and financial governing institutions play a role in the overall developmental strategy of the government. To accomplish that, central banks in late-developing countries are endowed with extensive powers to regulate the banking system and shape both the structure and behavior of commercial banks. Therefore, in late-developing economies, the separation between the monetary authority and a central bank’s supervision authority is often blurred and in many cases the two authorities are combined. This chapter traces the discussion and debates concerning the formulation of the Bank of Israel Law (1954), and argues that the designers of the Bank—the government and David Horowitz, who was its first Governor—shaped the Bank with the view that its primary aim would be to enable the government to tighten its control over the banking system. The chapter refutes the common claim that the Bank of Israel was a distorted version of a model Western central bank by demonstrating that it is was a custom-designed semi-autonomous institution to address a pressing local policy problem.