December 23, 2018 / 1:11 PM / a month ago

Growing risks to Israel's financial system from asset price drops -cenbank

JERUSALEM, Dec 23 (Reuters) - Risks to Israel’s financial system increased in the second half of 2018 due to falls in house prices and the value of other assets, the Bank of Israel said on Sunday in a semi-annual financial stability report.

The central bank said that given the gradual withdrawal of global monetary easing, the risk of a sharp drop in property prices and assets most sensitive to interest rate changes had risen.

“Part of this risk materialised in October 2018 (with) the rise in government bond yields in the United States and many exchanges around the world that recorded steep share price declines and higher volatility,” it said.

The risk of a financial asset price shock had risen, the bank added, due to a significant increase in the public’s exposure to bonds through passive investment in mutual funds and the impact of robotic trading on stock exchange liquidity.

Overall, the Bank of Israel said the country’s credit risks had declined in the last six months due to strengthening economic activity and falling government debt. However, it said that the existence of a budget deficit would make it harder for the government to continue spending.

It noted that growing risks to the global economy could indirectly impact Israel’s economy. The main threats were weakness in global debt markets, the U.S.-China trade war and monetary tightening, particularly in the United States.

The rate of credit expansion in Israel grew in the second half of the year, mainly led by businesses, which joined the upward trend seen by households, the central bank said.

It said real estate prices in Israel fell slightly, with housing starts growing no more than the rate of increase in demand dictated by demographics. (Reporting by Steven Scheer; Editing by Kirsten Donovan)

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