The Bank of Israel is freeing resources for the banks, by reducing the foreign currency reserves the banks are required to hold at the central bank.

The Bank of Israel today informed the banks that it will gradually reduce the secondary liquidity requirement, which forces the banks to hold reserves in foreign currency at the central bank. The requirement will finally be abolished altogether, the central bank said.

At the moment, the banks must create central bank deposits equaling 10% of their equity. The secondary liquidity requirement will be reduced by 1% of the total each month, the central bank said, until reaching zero.

In figures, the banks' obligatory reserves at the central bank will be reduced by $200 million a month over 10 months, thus freeing up their foreign currency resources, enabling them to expand their foreign currency lending.

Lately the Israeli banking establishment has been suffering from a crunch in foreign currency sources. Interest rates the banks are charged have risen, even though only First International Bank of Israel has had its credit status downgraded, said a source at one of the banks.

Another problem is that the influx of foreign currency to Israel has sharply decreased.

The banks have consequently raised interest rates for "preferred" customers, from Libor + 1% a month ago, to Libor + 1.6%-1.8%.

By freeing up resources, the central bank move could induce the banks to lower those interest rates again.

The Bank of Israel monetary department commented that the change complies with central bank policy the world wide, to reduce reliance on liquidity rates as a monetary tool. Secondary liquidity, the central bank noted, is a relic of the time the main use if foreign currency reserves was to stabilize the exchange rate.