Israel's banks have in recent years scaled down their foreign activities after three major lenders - Leumi (>> Bank Leumi Le Israel BM), Hapoalim (>> Bank Hapoalim Ltd.) and Mizrahi Tefahot (>> Mizrahi Tefahot Bank Ltd.) - came under investigation, and in some cases were handed down hefty fines, by U.S. authorities over tax evasion.

The Bank of Israel said it had told financial institutions to further limit overseas activities.

"We are requiring the banks to reexamine their remaining activity abroad, to reduce it to a smaller number of countries and main foreign banking offices, in a manner that will allow the appropriate allocation of resources — in terms of quality and quantity — for proper management of risks and other aspects of compliance," the central bank said in a statement.

The directive includes tightened supervision over subsidiaries, increased vigilance in setting up customer accounts, and defining an exit plan for activities that are not in line with this new strategy.

The Bank of Israel said it also expanded the list of incidents occurring at foreign subsidiaries that require reporting.

Leumi paid $400 million (298.57 million pounds)in fines to U.S. authorities in late 2014 while Hapoalim has set aside close to $200 million to cover potential fines as its investigation is ongoing.

(Reporting by Ari Rabinovitch, editing by Louise Heavens)