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BANK OF ISRAEL
Office of the Spokesperson and Economic Information
July 1, 2014
Press Release
Letter of the Supervisor of Banks submitted with the 2013 Survey of Israel's Banking System
Global and domestic economic activity continued to present challenges to Israel’s banking
system in 2013. Against the background of the continued slow and fragile global economic
recovery, Israel’s GDP grew by 3.3 percent, with weakness in exports, a slowdown in
growth in investment, and improvement in the labor market. Likewise, interest rates
remained low and the increases in home prices continued in 2013 as well. In this
environment, the banking system continued to display resilience and stability—its core
capital ratio increased, reaching 9.4 percent at the end of 2013, and the return on capital was
8.7 percent, similar to the long term average.
In recent years, the banking system has been in a process intended to strengthen the
adequacy, level and quality of its capital. The Banking Supervision Department and the
banking system are advancing the process in accordance with the recommendations of the
Basel Committee on Banking Supervision, and in a manner similar to how it is being
advanced in other banking systems around the world, within the framework of implementing
the lessons learned from the global financial crisis. Beginning on January 1, 2014, banks in
Israel are implementing the Basel III framework recommendations related to capital
adequacy, with the Banking Supervision Department monitoring the implementation and
following the undertaking. At the same time, the Banking Supervision Department and the
banking system are preparing for the gradual implementation, beginning January 1, 2015, of
the Basel III liquidity coverage recommendations. These processes strengthen the stability of
the banking system, a necessary condition for continued proper functioning of Israel’s
economy and the security of the public’s deposits.
This year the Banking Supervision Department continued monitoring the development of
risks faced by the banks and assessing the manner in which they identify and manage them.
The exposure to credit risk was emphasized—primarily the risk deriving from the state of
large borrowers in the economy, and exposure to the construction and real estate industry.
Past experience teaches that it is actually when indices are pointing to a bull market that
extra attention needs to be placed on the proper classification of credit as well as on
allowances and suitable reserve buffers. It is important to emphasize that in accordance with
measurement and disclosure regulations, the allowance for credit losses needs to reliably
reflect all the expected losses in the credit portfolio, even if they have not yet been
identified.
In order to better understand the focus points of risk to which the banking system is exposed,
and to examine its resilience to crises, the Banking Supervision Department conducted stress
tests on the basis of a uniform scenario, and integrated the banking system into the process.
Bank of Israel - Letter of the Supervisor of Banks submitted with the 2013 Survey of Israel's Banking System
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The results of the tests indicate the main focal points of risks in the banking system’s
activity—credit to the construction and real estate industry and housing credit, leveraged
credit, and the concentration in the credit portfolio—as well as the sensitivity of the
securities portfolios to changes in interest rates and stock prices. The results also indicated
that the banking system is relatively robust, due to measures taken over the years to
strengthen the capital adequacy.
Against the background of the continued increase in housing prices and in credit for
housing, and in continuation of steps taken by the Banking Supervision Department in
recent years, the Banking Supervision Department took additional steps during the reviewed
year which were intended to reduce the risk to borrowers and lenders. In March 2013,
guidelines were issued, the goal of which was to increase the capital buffers and the group
allowance for credit losses, in respect of the increased risk in the housing credit portfolio. In
August 2013, limitations were placed on the variable interest rate share of a housing loan,
and a prohibition was placed on granting housing loans with a payment to income ratio of
greater than 50 percent, and housing loans with a term to final payment of more than 30
years were also prohibited. Along with these steps, the Banking Supervision Department
instructed banks to ensure proper underwriting processes and a higher level of disclosure to
customers, with the goal of reducing the risks, to both borrowers and lenders, inherent in
housing loans. With that, both borrowers and lenders are still exposed to the realization of
risks in cases of changes in economic conditions, including employment and interest rates.
This year, the Banking Supervision Department emphasized the continued implementation
of the recommendations from the interministerial Team to Examine Ways to Increase
Competitiveness in the Banking System, recommendations which were intended to promote
competition in the system and which were published in March 2013. The Banking
Supervision Department acted to implement the recommendations that are within the Bank
of Israel’s area of authority and to advance legislative amendments required to do so. Its
activity centered on increasing fairness in the relations between banking corporations and
their customers, and in particular in bolstering the strength and position of households and
small businesses as customers receiving financial services from the banks: the Banking
Supervision Department worked to formulate a comprehensive periodic report to the
customer (banking ID) in order to increase the efficiency of disclosure to customers, and the
formulation of guidelines which will ease the transfer of debit orders from one account to
another and to open accounts via the Internet.
In addition, the Banking Supervision Department works to advance the infrastructure for the
entrance of a new participant in the banking industry and to support the setting up of credit
unions or banking cooperatives, in accordance with the business, competitive, and legal
reality in Israel.
The Banking Supervision Department also acted in the areas of fees and customer activity in
securities: it required banks to include in their management services a basic track for current
accounts which does not cost more than NIS 10; it cancelled securities deposit management
fees for makam and money market funds; it instructed banks with regard to repricing
security purchase and sale commissions; it set a maximum commission for the purchase and
sale of securities; and increased transparency in regard to the discounts that banks extend to
their customers.
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In recent years, banking regulation was tightened worldwide against the background of
failures revealed in it in the past. International standards are developed accordingly and
increasing expertise is required to deal with risks. Furthermore, countries around the world
are conscientious in cross-border compliance and they use means of enforcement abroad,
through increasing cooperation between their supervisory authorities. Banks in Israel need to
meet the international standards and to cooperate with other countries in order to advance
and be among the leading banks of the world. This poses a challenge to the banking system
and requires it to improve the risk assessment processes, including setting up broad
information and reporting infrastructures, setting up advanced credit rating systems, and
more. Overcoming business continuity risks and cyber threats also requires continued
appropriate preparedness.
The Banking Supervision Department worked this year to improve the banking system’s
preparedness for emergency situations. As part of that, it is formulating a draft amendment
to the banking order regarding dealing with bank resolution, in accordance with legislative
changes worldwide, taking into account recommendations of the IMF, and with consultation
and cooperation with government ministries and other supervisory authorities in Israel.
The banking system deals with challenges that originate in a changing risk environment:
moderate economic activity, enhanced and cross-border enforcement, increasing competition
alongside increasing supervision on consumer aspects and public sensitivities to the prices
of banking services. This situation is liable to lead to increased appetite for risk and to
seeking out high risk business opportunities. Against the background of the fragile recovery
of the global economy, it is important that the banking system continue to be managed in a
conservative and thought-out manner—through improved management of risk, corporate
governance, and control—and concurrently to take significant steps to increase efficiency.
Improved operational efficiency will allow the banking corporations to maintain both
adequate profitability and a high level of service and fair price to the customer.
The Banking Supervision Department will continue to act to maintain the stability of the
banking system, to increase the competition in it, to advance the fairness in relations
between banks and their customers, and to improve the services provided to customers, in a
manner which will strengthen the public’s trust in the banking system.
David Zaken
Supervisor of Banks
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