JERUSALEM, June 29 (Reuters) - There is no danger to the stability of Israel's banking system should there be a severe recession, although the hit to banks' profits could be significant, according to the results of the latest Bank of Israel stress test.
The central bank on Sunday said it tested two scenarios, one of which was an adverse one that included a domestic recession with a large impact to the housing and real estate industry as a result of a deterioration in the geopolitical situation.
"In a situation in which the adverse scenario is realised, a significant impact on the banking system is expected, but no risk to its stability is seen," the banking regulator said.
"The immediate impact derives from exposure to credit risk and to market risk. The recession will make it difficult for business and private borrowers to meet their commitments, and the banks will record large losses in the credit portfolio, half of which are in the housing, construction and real estate credit portfolio."
The central bank noted that the concentration in Israel's credit market would also lead to sharp increases in bond yields and declines in the stock market, which are expected to cause significant losses in the banks' securities portfolios, impact profitability and erode capital.
In this case, banks' profits would drop more than 3 billion shekels ($876.5 million), while Tier I core capital would decline to 7.5 percent of risk weighted assets from 9.3 percent in September 2013 - when the test began.
Core capital would range from 6.1 to 8.3 percent, "levels that attest to the stability of the system and to it having sufficient capital buffers to absorb serious macroeconomic shocks to the Israeli economy," the Bank of Israel said.
It noted that the stress test does not include effects of the scenario on liquidity risk or operational risk as well as withdrawal of deposits by foreigners and banks' actions such as selling stocks and bonds and reducing credit volumes.
$1 = 3.4227 Israeli shekels Reporting by Steven Scheer