Bachar Reforms Have Improved Israel’s Capital Markets, but Only Half of Recommendations Have Been Implemented, Report Says

Two years after the passage of the Bachar Reforms – landmark legislation that sought to bring competition to Israel’s financial markets – only half of the recommendations have been implemented and momentum for financial reform has stalled, according to a new report.

And while there has been progress in reducing conflicts of interest and increasing non-bank credit through the capital markets for larger firms, some of the most important reform recommendations to build a globally competitive financial services industry have yet to be completed, dampening economic growth, researchers found.

A policy brief issued by the Koret Fellows Program and the Milken Institute, Beyond Bachar: Next Steps for Financial Reform,evaluates the progress made since the Bachar Reforms were approved by the Knesset two years ago. It found substantial progress in these areas as a result of the approved reforms:

  • An increase in overall market capitalization of the private sector as a portion of GDP, rising from 83 percent in 2005 to 101 percent in 2006.
  • The emergence of a corporate bond market, rising from 12 percent of GDP in 2005 to 21 percent in 2006 (still small, of course, compared to the United States, where it is 201 percent of GDP, but substantial improvement).
  • An increase in the non-bank credit market of nearly 7 percent from 2005 to 2006.


“After 15 years of deliberation about financial reform, these first steps are important, but it’s too early to run victory laps,” said Glenn Yago, Senior Koret Fellow and a research director at the Milken Institute. “The Bachar Reforms that have been implemented are creating alternative capital flows, but there is more work to be done to match the financial systems of developed economies.”

The failure to implement half of the 10 reforms called for in the legislation, as well as other recommendations from the Bachar Committee, has resulted in undermining the objectives of financial reform.

For example, one of the key goals of reform was to reduce the high concentration of the banking industry in the country’s financial system, which has led to conflicts of interest and fewer choices for investors and businesses. But since the Bachar Reforms were passed, banking concentration, as measured by the market share of the largest two banks, actually increased by 4.23 percent. Additionally, bank market share increased in deposits and new provident funds and only slightly decreased in insurance assets.

“Even though specific recommendations have been implemented, the absence of implementation of others has created a situation where gaps in the reforms have enabled entrenched financial interests to bypass the legislation’s intent to reduce concentration of capital and the lack of competitiveness resulting from conflicts of interests,” the report states.

Among the recommendations that still need to be implemented:

  • Facilitate new distribution channels for financial services, including online fund purchasing and Internet banking
  • Create national securitization legislation to reduce bank risks and create new markets
    • Implement differentiated distribution pricing to facilitate these new distribution channels (e.g., retail within and outside banks, and institutional investors)
  • Enable entry for foreign funds with appropriate regulatory oversight
  • Modify regulations to allow the creation of money-market funds
  • Establish regulatory guidelines for money-market funds, deposit insurance and mutual- fund distribution by non-members of the stock market
  • Pass national standards for the sale and repurchase of Repo securities


The Bachar Committee, headed by Dr. Joseph Bachar, then-director general of the Ministry of Finance, was created to examine the Israeli Banking System and propose reforms that would further reduce government involvement in the financial markets and promote competition by reducing the grip of the banking industry in all parts of the markets.

The report urges ongoing monitoring of Israel’s financial infrastructure to ensure that the means and methods of financing Israel’s future, including the distribution of financial products, are available to the broadest number of entrepreneurs and projects.

The Fellows Program, established by the Koret Foundation, provides annual fellowships to exemplary students to serve as economic research assistants and to complete independent economic research on issues impeding small business development, employment expansion and private sector economic growth in Israel. The program is the policy arm of, and is managed in Israel by, the Koret Israel Economic Development Funds (KIEDF).

Beyond Bachar: Next Steps for Financial Reform, by Koret Fellows Amit Goldwasser, Diana Zaks and Shahar Shlush, and Yago, is available for free download at

About Koret Fellows and Milken Institute policy briefs: The Koret Fellows and Milken Institute policy briefs are based on research and policy analysis by the program's research team, directed by Glenn Yago, along with Zev Golan and Ronit Purian, with input from the program’s Senior Fellow, Prof. Yair Orgler.

About the Milken Institute: The Milken Institute is a nonprofit, independent economic think tank based in Santa Monica, California, whose mission is to improve the lives and economic conditions of diverse populations around the world. The Institute has been working for more than a decade with Israeli business and government leaders on ways to reform its financial system. (


Jennifer Manfrè, Associate Director of Communications
Milken Institute
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Susan Wolfe, Director of Marketing & Communications
Koret Foundation
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