Bachar Reform

The **Bachar reform** was a major Israeli capital-market restructuring adopted in 2005 following recommendations by an inter-ministerial committee chaired by Finance Ministry Director-General Joseph (Yossi) Bachar. Its central measure was to separate banks from the management and ownership of major mutual-fund and provident-fund businesses. The reform aimed to reduce concentration and conflicts of interest, encourage competition in savings management, and develop financing alternatives outside the banking system.^[1][2]

Background and committee

In April 2004, Israel’s finance minister appointed an inter-ministerial team to recommend practical steps for establishing a more competitive and efficient capital market. The team included representatives of the securities regulator, the competition authority, the Bank of Israel and its banking supervisor, the Ministry of Justice, and the Capital Market, Insurance and Savings Division of the Finance Ministry. The committee was tasked with developing implementable structural measures, rather than conducting a separate research program; it drew on earlier committee work, the experience of participating agencies, and consultations with market practitioners and academics.^[1]

The committee published its report in September 2004. The government approved it in early November, with some changes, and the Knesset enacted the reform legislation on July 25, 2005.^[2] “Bachar reform” commonly refers both to the committee’s proposals and to the legislative and market changes that followed. The committee’s report described its recommendations as part of a broader government policy package, rather than a stand-alone solution. Other measures in that policy context included selling newly established pension funds, reducing issuance of government earmarked bonds, and aligning capital-gains tax treatment for foreign and domestic securities.^[1][2]

Policy problem and objectives

Before the reform, banks had an important role in multiple parts of the financial chain: they served customers, distributed financial products, and controlled or managed investment funds that held household savings. The committee’s structural approach was intended to address the potential for conflicts when an institution both advised customers and had a financial interest in the products being offered. It also sought to reduce the concentration of financial power and to create nonbank institutions able to manage savings and provide financing.^[3]

In a July 2005 address to the Knesset Finance Committee, Bank of Israel Governor Stanley Fischer described the reform’s objectives as reducing concentration, increasing capital-market competition, limiting conflicts of interest, and creating significant alternatives to banks as sources of finance. He supported separating provident and mutual funds from banks, while also arguing that banks could have a role in distributing products after separation, subject to safeguards against the use of their extensive distribution networks to unfairly favor particular providers.^[3]

These stated aims are policy objectives, not a guarantee that every expected market outcome would follow. The committee itself cautioned that its structural recommendations were necessary but not sufficient to address all of Israel’s capital-market problems. It specifically identified further development of securitization, commercial-paper markets, and private equity as areas requiring additional work.^[1][2]

Main structural measures

The most prominent element was the requirement that banks relinquish control of mutual-fund and provident-fund businesses. These funds manage savings on behalf of investors and savers; moving their ownership and management outside banking groups was intended to create a distinct nonbank asset-management sector. The legislation also addressed banks’ continuing role in advising on and distributing financial products. The design therefore combined separation of ownership and management with the possibility of continued distribution, rather than removing banks altogether from customers’ access to investment products.^[2][3]

The reform also dealt with the way financial products could be marketed through banks. Fischer’s contemporaneous account described proposed restrictions on bank fees as a means of limiting unfair advantages arising from the banks’ distribution networks. This illustrates a central regulatory tension in the reform: banks’ branches and customer relationships could provide a convenient channel for selling products, but the same reach could allow a bank to steer customers toward affiliated products if ownership and distribution incentives were not addressed.^[3]

The changes were implemented through legislation and a transition process, rather than an instantaneous transfer of every business on the day the law passed. The broad purpose was to change the structure of financial intermediation over time, creating independent fund managers and other nonbank financial institutions while banks concentrated more on banking activities. The detailed legal requirements and transition arrangements belong to the laws and regulations implementing the reform; the committee report establishes the overall policy framework.^[1][2]

Implementation and market effects

The reform took effect beginning in mid-2005 and required banks to divest a range of noncommercial financial activities, including mutual funds, insurance, pension, and provident-fund businesses, according to a later International Monetary Fund assessment. The IMF reported that, following the restructuring, banks focused more on traditional banking and the nonbank financial sector expanded and played a larger role in credit markets.^[4] This characterization describes a broad institutional shift; it does not imply that the reform alone caused every subsequent change in nonbank finance or credit.

The growth of nonbank institutions altered the relationship between household savings and business finance. Independent investment and savings managers could become significant financial intermediaries outside bank ownership, while banks remained important as lenders and as providers of financial services. A 2007 policy brief reviewing progress after the legislation’s passage described the reforms as creating alternative capital flows, while also noting that further development was needed for Israel’s financial markets to match those of developed economies.^[5]

The change also redistributed commercial opportunities. Fund-management activities formerly conducted within banking groups could be sold to or operated by nonbank financial firms. Banks could retain roles as distributors and financial-service providers under the applicable rules, but ownership separation altered their direct position in the management of these savings products. The committee’s original rationale was structural: reducing the possibility that control over customer access, advice, and investment products would be concentrated in the same banking groups.^[1][3]

Assessment and limitations

The reform is significant as an example of structural regulation: rather than relying solely on conduct rules to manage potential conflicts, policymakers changed which types of businesses banks could own. Its stated objectives included competition and a broader set of financing channels, and the IMF’s later description records the expansion of nonbank financial activity and its increased role in credit markets.^[3][4] Those observations indicate a change in the composition of the financial system, but by themselves do not establish the reform’s net effect on prices, service quality, consumer outcomes, or market concentration.

The committee’s own caveat is important when interpreting the reform. It presented separation as one component in a wider capital-market agenda and said that additional solutions would still be needed for other market weaknesses.^[1][2] A 2007 review likewise described progress in developing alternative capital flows while identifying further work as necessary.^[5] Accordingly, the Bachar reform is best understood as a foundational reorganization of Israel’s financial-sector structure, not as a comprehensive resolution of every issue in savings, banking, or capital-market development.

Significance

The Bachar reform changed the institutional boundary between banking and investment management in Israel. It sought to make fund management less directly integrated with banks, reduce potential conflicts of interest, and give nonbank financial institutions a larger role in managing savings and financing economic activity. Its effects formed part of a broader policy and regulatory evolution involving the Ministry of Finance, the Bank of Israel, the Israel Securities Authority, and other public bodies.^[1][2]

The reform remains a reference point in discussions of competition and the separation of financial activities because it paired a clear structural intervention—divestment of fund businesses—with continued debate about distribution, market power, and the development of nonbank finance. Its original committee report also emphasizes a lasting limitation: structural separation may change incentives and institutional arrangements, but does not substitute for the development of markets, instruments, and regulatory solutions that the reform itself did not address.^[1][2]