There are three main sectors to the Israeli banking system: the Central Bank, the Commercial Banks, and the Investment Banks. Israel's Central Bank is Bank of Israel, which was established in 1954. It is responsible for managing monetary police, administering the currency system and directing the credit and banking system. It seeks to stabilize the value of the New Israeli Shekel within the country, by controlling inflation, and outside the country, by attempting to achieve a balance of payments. It also tries to maintain a high level of production, employment, national income, and capital investment in Israel by imposing reserve requirements on banks and varying the interest rates. Bank of Israel also serves as the banker of the government, financial advisor to the government, manager of Israel's foreign currency reserves, controller of foreign currency, manager of government loans, and controller of banks.

Still, the Commercial Banks form the real center of the Israeli banking system. There are twenty-six commercial banks in Israel, including two Arab banks and two co-operative societies, although the top five banks account for 90% of the banking business. They follow the British and Continental banking system, in which lending is secured by self-liquidating assets, and use the overdraft system, in which the customer is extended a line of credit and is only charged for the sum actually used. Israeli Commercial Banks are also heavily involved in the securities markets and many own industrial and commercial enterprises. Recently, many American-trained Israeli economists are encouraging Israel to move closer to the American banking system, which sets up a clear separation between Commercial Banks and the capital market to avoid potential conflicts of interest. They have proposed a law to the Knesset that would require Commercial Banks to gradually sell off most of their corporate holdings.

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Investment Banks grant longies loans to industrial, agricultural, housing and enterprise concerns for investment, which are linked to either the "cost of living" index or a foreign currency exchange rate. Nearly all Israeli Investment Banks are subsidiaries of Commercial Banks, not government owned. Almost every Israeli Commercial Bank owns a Mortgage bank, which is registered on the Tel Aviv Stock Exchange and issues debentures as a source of capital while receiving funds from the government that allows them to grant longies mortgage loans to low-income groups and new immigrants at very reasonable rates.

The Israeli Mortgage Banking system has only a 0.75% on the spread between interest rates charged on resources and the interest rates charged on mortgages, in addition to boasting an extremely low rate of defaults. This is due to their electronic payment system, in which mortgage payments are automatically deducted from the customer's checking account each month, and the guarantors, in which customers must have 3-5 people agree to guarantee their loans. Since most guarantors are family members, borrowers are reluctant to refuse payments. Recently, this system has been criticized, since it allows the defaulter to stay in their home while the banks pursue their guarantors. To remedy this, the Knesset passed the 1992 Law of Guarantee, which demands that banks exhaust all other collection efforts, such as repossessing the mortgaged property, before turning to the guarantors.

One important role of the Israeli banks is trading foreign currency. Until 1994, the Bank of Israel determined the exchange rates and absorbed the supply of and demand for foreign currency at that rate. Recently, it has moved to a continuous multilateral trading system to put Israel more in step with major international money markets and to make the individual banks more independent of Bank of Israel in determining foreign currency exchange rates.

Few foreign banks now operate in Israel, although a number of foreign banks had a substantial presence prior to the establishment of the State of Israel. Many left in between the world wars and others have run into financial difficulties. Presumably, foreign banks are discouraged by the heavy governmental regulations and the volatile political situation. Right now, only the Polish Polska Kasa Opeik Bank and the German Continental Bank still remain in Israel, although some Jordanian and Arab banks restored their operations in 1994. With the development of the peace process, and the continual growth of Israel's GDP, others should soon be joining them.

Conversely, Israeli banks are very active abroad, with the leading banks owning subsidiaries in Canada, France, Switzerland, Uruguay, the United Kingdom, and the United States (especially in New York City), among other places. They finance foreign trade and commercial relations in the country where they operate, serve the local Jewish community, and serve the local residential and business community by competing for customers. Until recently, they have done well, although their current low profits and the 1985 stabilization of the Israeli economy contributed to a decline in investment in foreign branches of Israeli banks.

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