Israel banks need to raise Tier 1 capital -regulator

JERUSALEM Aug 7 (Reuters) - Israel's banking system is strong but banks' Tier 1 capital reserves are far too low compared with those in other Western countries, Israel's chief banking regulator said on Sunday.

David Zaken, the Bank of Israel's Supervisor of Banks, said the current minimal requirement for Tier 1 capital was 7.5 percent to its risk.

"It will be higher," Zaken told a news conference. "We expect banks will raise their Tier 1 capital."

He declined to say what the new minimum will be but it will be raised to conform to new Basel 3 regulations. Regulations, he added, may not be uniform but could be bank specific.

At the end of 2010, Israeli banks had Tier 1 capital adequacy ratios of 8.0 to 9.1 percent -- well below the OECD average of about 12 percent. Including Tier 2, Israeli banks' adequacy ratios were 12.5 percent to 15.1 percent, versus an OECD average of 14.5 percent.

"All banks in developed countries have already raised their core capital," Zaken said. "This is the trend and we cannot ignore this trend. But they (Israeli banks) have time to do it."

However, raising Tier 1 capital may limit banks' dividends.

"It will be harder to pay dividends because they have to raise Tier 1 capital," Zaken said.

Zaken also said the U.S. debt ratings downgrade by Standard & Poor's on Friday should not have much of an influence on Israeli banks, although he noted banks have some exposure to U.S. debt.

He met senior officials from the Finance Ministry and Securities Authority on Saturday night to discuss the downgrade and global market volatility.

"The implications of events in the global markets are not clear at this stage, but the Bank of Israel and the Ministry of Finance monitor developments constantly, and are ready to use the tools available to them as necessary," the central bank and Finance Ministry said in a joint statement.

"Israel's macroeconomic situation is good, and so far the debt crises abroad have had a limited impact on Israel, due to its macroeconomic strength, achieved by means of adherence to fiscal discipline, among other things, in the last few years."

Still, key Tel Aviv share indices slumped more than 6 percent on Sunday, witch bank shares down as much as 8.5 percent.

A more pressing issue for Israeli banks in the longer term, he said, was a very high concentration of loans to big borrowers, or leaders of the top holding companies. At the same time, housing loan growth continued last year at a rise of 16 percent versus total credit portfolio growth of 6 percent. (Reporting by Steven Scheer; Editing by Mike Nesbit)