Background
Banking in Israel is characterized by a highly-centralized structure centered on two major banks, Bank Leumi and Bank Hapoalim, alongside three smaller banks, Bank Discount, Bank Mizrachi Tefahot, and the First International Bank of Israel.
The current banking sector’s centralized structure creates failures such as charging heavy commissions to the public and the centralization of banking activity in channels where generating profit involves relatively small risks and efforts.
These failures lead to the detriment of the banking activity that is aimed at financing business ventures that involve a higher level of risk. In addition, the fact that some of the major banks are controlled by wealthy family groups adds another tier of problems lying in an oligopoly controlling core assets of economic activity.
In 2022, two new digital banks were licensed, One Zero Digital Bank, which became the first new Israeli bank in 44 years, followed by, “Esh Bank Israel,” which received a bank license in the end of 2022.
In the last decade, many foreign banks have opened representative offices in Israel. However, none of them have started genuine retail commercial activity in the country, and most of them work on recruiting customers for the investment banking and private banking sphere.
Along with licensing two new digital banks, the Banking Supervision Department in the Bank of Israel (“BOI”) is working to increase competition in the banking sector by:
- Granting a license for two new companies to operate as credit card clearing companies.
- Incentivizing the use of the Central Credit Register (CCR) to create competition in the retail credit market, expanding access to credit and enabling an expansion of the information available to credit providers wishing to evaluate a customer’s credit risk level.
Credit Rating
Israel’s government bonds have been rated since 1988 by the credit rating agency Standard & Poor’s (S&P).
Israel was first rated by credit rating agencies Fitch and Moody’s in 1995. Israel’s Foreign Currency Credit Ratings (as of end-2025)
- S&P: A / A-1
- Fitch: A
- Moody’s: BAA1
Regulation and Regulatory Bodies
The regulation of banks constitutes a significant proportion of the activity of the central bank, the “Bank of Israel”. The well-developed regulation, alongside effective control of the banks’ activities, is what eventually ensured the ability of Israel’s banking system to weather the devastating effects that the global banking system suffered during the 2008 crisis. Due to strictly enforced regulation, the banks in Israel abstained from extending unsecured credit and made sure that suitable reserves would be included in the various aspects of their activity. When such problematic credit was discovered, the banks had sufficient reserves to cope with it during this crisis, as well as during aftershocks that stemmed from it.
Despite the above, some believe that Israel’s financial system has a major risk component because of the high volume of credit that is given to households for financing residential mortgages. Most of the mortgages in Israel are taken at fixed interest rates with or without an “exit” option for updating the interest rate periodically, while only minority of the mortgages are linked to the Consumer Price Index (CPI). The recent decrease in the base interest (Prime) from peak of 6.0% to the current 5.56% (January 2026) should ease the pressure on mortgage holders.
The annual inflation rate has started to decline from the peak of 5.3% (Dec-2022) to the current estimated 2.4%, which should enable the Bank of Israel to keep lowering interest rates.