By Steven Scheer and Tova Cohen
JERUSALEM (Reuters) - A parliamentary panel has proposed lawmakers oversee Israel's banking regulator after blaming the central bank for being too lax on regulation that led to high-profile loan defaults by some of the country's largest borrowers.
A report published by a special committee that was set up in 2017 to examine granting of credit to a number of Israeli tycoons who were highly leveraged called into question enforcement of the Bank of Israel's Supervisor of Banks.
While the report was critical of all of Israel's financial regulators, it was particularly harsh on banking supervision.
"The committee's conclusion is that the Bank of Israel's Supervisor of Banks acts as a captive regulator ... which does not act to deter those it supervises, and thus harms the public interest," said the report, which was published on Tuesday.
It added that the banks had a considerable influence on supervisors.
"Several decades after the crisis of the 1980s, we discover that the banks and the financial system are still a 'black hole' in Israeli society and an exclusive club that even the Knesset (parliament) cannot penetrate in order to investigate its conduct," committee Chairman Eitan Cabel wrote.
The panel recommended establishing a parliamentary committee to supervise the financial regulators and said the Bank of Israel must publish its enforcement policies and establish an investigative department to improve its ability to enforce and deter. Any actions require approval from the full parliament.
In response, the Bank of Israel said the committee's report ignored facts and reached "erroneous" conclusions without examining long-term implications.
"Although the committee declares that it doesn't intend to harm the credit market, a large part of its recommendations could do just that," the central bank said, noting the report ignored measures taken to reduce credit to large borrowers.
It warned that "adopting a large part of the report's main recommendations could lead to ... ongoing political intervention in the supervision and regulation of the financial system, to the point of truly harming the ability to preserve the financial system's stability."
The central bank added that while it can expand regulators' reporting to the Knesset, it must be done in a way that maintains the Bank of Israel's independence.
(Reporting by Steven Scheer and Tova Cohen; editing by Emelia Sithole-Matarise)
