Calcalist has learned that in early February 2012, the bank will launch a pilot investment program wherein it will invest some of its foreign exchange deposits in foreign stock.
Initially, the bank will invest a $500 million (about 0.7% of its deposits), later expanding its investment to up to $2 billion (some 2.6% of its deposits). The program will be submitted for the approval of the BOI's Monetary Committee.
The investment program was made possible due to the new Bank of Israel Act enacted a year and a half ago, which abolishes restrictions set forth by the old law (from 1954). The new law now permits the bank to purchase, hold and transfer foreign gold, forex and stock.
The initiative is further supported by a new risk management system that the bank installed last year for some $30 million. The system, nicknamed "Busy", is used by over 20 central banks worldwide.
It will allow the bank's Market Operations Department to invest part of its forex reserves in assets the risks of which it could not previously gauge such as corporate bonds and government bond options.
The program restricts the bank's investments to diversified ETFs rather than specific shares.
The portfolio will be managed by an external manager chosen through a tender the Bank will call in the near future. In order to cut excess management fees, the external manager will be obligated to formulate a 600-share index tracking model which simulates an existing ETF that includes thousands of shares.
Wide profit margins wanted
This MO is common practice among central banks throughout the world. External forex investment management is nothing new – in the 1990s, the Bank invested some 4% of its forex deposits in mortgage-based bonds with US government guarantees which were managed by several external portfolio managers.
The Bank of Israel categorically states in all of its documents that it is not a commercial bank or a regular business entity and its financial activity is not profit-oriented but rather aims to achieve its goals as stipulated by law.
However, it seems that the purpose of the bank's investment initiative, beyond seeking to expand its risk spread, is to widen its profit margins.
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