February 19, 2013 / 2:23 PM / 5 years ago

Israel cenbank tightens mortgage loan regulations

JERUSALEM, Feb 19 (Reuters) - Israel’s banking regulator on Tuesday imposed tougher mortgage regulations in a move aimed at reducing banks’ housing loan risks in their credit portfolios.

The Bank of Israel said housing credit has surged 76 percent the past five years along with a rise in home prices.

“The directives are intended to express better the risk inherent in housing loans on banks’ portfolios - both in terms of capital allocations and in terms of allowance for credit losses, and thus to strengthen banks’ ability to absorb losses without negatively impacting their ability to provide financing for the economy’s needs,” said David Zaken, the central bank’s supervisor of banks.

The guidelines, which were likely to raise mortgage costs to consumers, also enable banks to increase credit to the construction industry.

Under the draft measures ordered by the central bank, housing loans with a loan to value ratio (LTV) of up to 45 percent will remain weighted at 35 percent of the basic capital adequacy ratio of some 9 percent of a bank’s assets.

But loans with an LTV of 45-60 percent will be weighted at 50 percent for capital requirements, up from 35 percent previously. Loans with an LTV above 60 percent will be weighted at 75 percent for capital requirements.

The draft guidelines also establish a requirement to increase the provision for credit losses in housing loans so that the ratio between the group provision and the balance of housing loans is at least 0.35 percent, up from around 0.22 percent at the end of the third quarter of 2012.

The central bank issued draft guidelines in 2012 in which banks will have to hold core capital equivalent to at least 9 percent of their risk-weighted assets by the end of 2014. Israel’s current core capital ratio - a measure of financial strength - is 7.5 percent, with banks averaging about 8 percent. (Reporting by Steven Scheer; editing by Ron Askew)

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