JERUSALEM, July 13 Israel's financial system is
stable amid a challenging global environment and as interest
rates are low but the corporate bond market and banks face some
risks, the Bank of Israel said.
The central bank a year ago established a financial
stability division in its research department. In its first
report, it said on Monday the domestic financial system has
demonstrated "impressive resilience both during the global
financial crisis of 2008 and following it".
As a result of the crisis, authorities supervising the
financial system have tightened cooperation between them and the
use of macro-prudential tools to identify and handle systemic
risks has been increased, it said.
Also, the banking regulator implemented policies to reduce
banks' exposure to the rapid rise in the volume of mortgages,
while initiating stress tests to asses banking system risks.
But there is high exposure of banks to the construction and
real estate industries and to mortgages, and housing comprises a
sizable share in the household asset portfolio, the report said.
As a result, the main risk to the financial system is the
possibility of a domestic or external shock that may lead to a
sharp increase in interest rates or a recession. That may have a
negative impact on borrowers' income and be accompanied by a
sharp turnaround in the housing market.
"In such a scenario, there would be a heavier repayment
burden on households, a decline in borrower quality, and a
negative impact on the banks' capital ratios and profitability.
Such a scenario is expected to also have an impact on
contractors and to further harm the banks' financial results,"
said the report, slated for publication once or twice a year.
The other risk to which the financial system is exposed is
the underpricing of risks in Israel's corporate bond market.
"This risk may negatively impact the process of resource
allocation in the economy, and in the case of a sharp turnaround
in the markets, it may have a negative impact on pension
savings, banks exposed to companies that have issued bonds, and
the supply of credit in the nonbank market," the report said.
Last month, results of a Bank of Israel stress test showed
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.
(Reporting by Steven Scheer)