Knesset Approves CoCo Bond Reform to Boost Credit Card Competition and Lower Rates
Israel's Knesset Finance Committee approved a regulatory fix enabling credit card companies to issue tradable CoCo bonds, cutting funding costs and boosting loan competition.
Credit card companies in Israel will soon be able to expand their loan offerings to the public and businesses while lowering interest rates, following a crucial regulatory fix approved by the Knesset Finance Committee. The reform allows these financial institutions to utilize CoCo (Contingent Convertible) bonds under more liquid and affordable conditions, saving millions of shekels annually in funding costs.
The bottleneck dates back to the 2017 Strum Law, which legally separated credit card companies from major banks to foster market competition. While this structural reform achieved its goal, a bureaucratic oversight left the newly independent credit card firms out of critical regulatory exemptions originally designed for banks and insurance companies under a 2017 securities order amendment. Consequently, companies like Max and Isracart were forced to issue non-tradable CoCo bonds, paying significantly higher yields to institutional investors.
Impact on Financing Costs and Market Competition
Under regulatory capital requirements overseen by the Bank of Israel, credit card issuers must maintain a financial buffer known as Tier 2 capital. CoCo bonds serve as an efficient instrument to build this capital cushion, featuring a built-in emergency mechanism where debt can be partially or fully written off or converted into equity during extreme crises, protecting the firm from collapse.
The broad consensus between the coalition and the opposition demonstrates that strengthening competition in the credit sector is a shared national interest, enabling significant economic measures for the public and the economy even during challenging times, noted the Forum of Credit Market Competitors.
With the loophole now officially closed through the Finance Committee's approval, existing CoCo bonds—such as approximately ₪400 million at Max and ₪313 million at Isracart—will see their interest rates automatically drop by 0.25% once listed for public trading. The amendment is expected to take effect immediately upon signature by the Minister of Finance, ultimately paving the way for cheaper credit and enhanced competition against the traditional banking sector.
