Reductions or Additions to Interest Rates

Bank of Israel Supervisor of Banks Customer – Bank Department (Regulation Unit)

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Phone: 02-6552680 :Fax: 02-6669077 780 P.O.B. Jerusalem

Jerusalem, 9 September 2013 Circular No. 2398-06

Subject: Reductions or Additions to Interest Rates (Management Instructions for Banks No. 421, 451, 470)

Introduction

1. The granting of interest rate reductions or additions on deposits or loans is limited in duration. After a period of time, it becomes a factor that obscures the price to the customer, complicating comparison shopping. These products do not, in themselves, provide effective disclosure or enable customers to make real comparisons. They are prevented by the concern that they obscure the product's price.

2. However, in practice, these are usually deposited in deposits that renew for a short period. In cases where a reduction or addition is granted, customers hold funds for a longer period (such as a weekly renewable deposit) for several months or even years. In effect, the customer is obligated to hold the deposit for the entire period of the first term, requiring negotiation with the bank at every renewal or change of interest rate date.

3. Regarding the issue of granting reductions or additions on loans, this was previously regulated in the context of Management Instruction for Banks No. 451 – Guidelines for Granting Housing Loans. This instruction was expanded to cover mechanisms regarding all types of credit.

4. In light of the above, and after consultation with the Advisory Committee on Banking Matters, I have determined this instruction.

Main Provisions of the Instruction

5. The Bank is required to apply the same interest rate addition or reduction that applied at the time of granting the loan, at the times interest rate changes are implemented, throughout the entire duration of the loan, in loans where the interest rate is not fixed and is not known in advance.

6. In loans where the variable interest rate is the LIBOR rate, the Bank may determine a mechanism for applying reductions or additions in extreme cases, provided the conditions specified in this instruction are met.

7. The Bank is required to apply the same interest rate addition or reduction that applied at the time of the deposit, at the times of deposit renewal or interest rate changes, throughout the entire duration of the deposit, in deposits where the interest rate is not fixed and is not known in advance. This obligation shall not apply in cases where the customer holds only a portion of the deposit amount at the time of deposit.

8. It is clarified that the term "loan" in this instruction includes an approved credit line, including a revolving credit line (including a credit card charge), where a specific amount is charged in advance. The amount exceeding the charged amount and the balance will be charged at a later date, with the addition of interest. For the sake of clarity, it is additionally clarified that the "loan term" refers to the revolving credit period, and not to the credit card line.

9. It is further clarified that the mechanism for determining the base interest rate will be an external objective basis. The determination thereof shall not have a direct impact on the Bank.

Application

10. This instruction applies to loans and deposits of "individuals" and "small businesses" as defined in the Management Instructions for Banks (Fees) (Services to Customers) (General) (Tashves 2008), with respect to which the engagement with the Bank was performed after its commencement.

It is clarified that for renewing deposits, the time of engagement with the Bank is the date of the deposit's establishment, not the renewal date. This applies to these deposits. It is agreed that this instruction shall apply from the first renewal date, six months after the commencement date.

11. Sections 16(a) and 16(b) of Management Instruction for Banks No. 451 – Guidelines for Granting Housing Loans are repealed.

12. An appendix shall be added to Management Instruction for Banks No. 470 – "Credit Card Charges": "(421) Reductions or Additions to Interest Rates".

Commencement

13. This instruction shall commence on September 1, 2014.

Update to the File

14. The following updates are made to the Management Instructions for Banks file in "B'Matzav":

Page to Insert	Page to Remove
*(9/13) [1] 421-1-2
*(9/12) [6] 470-5	(9/12) [6] 470-5
(9/13) [8] 470-6-7	(8/13) [7] 470-6-7
*(5/13) [16] 451-21	(5/13) [16] 451-21
(9/13) [17] 451-11-16,22	(5/13) [16] 451-11-16,22

*This page was reprinted but not updated, following the transition to double-sided printing.

With respect,

David Zaken Supervisor of Banks Bank of Israel