The Bank of Israel today published the semi-annual Financial Stability Report

·         The stability of the banks and insurance companies was maintained during the period surveyed in the report, despite the gyrations in the global financial markets and domestic events. The banks and insurance companies continued to improve their capital ratios.
·         The public and financial institutions are exposed to the risk that home and financial asset prices will decline sharply as a result of global recession, a change in the interest rate environment, an increase in Israel’s risk premium, or shocks that may lead to a significant decline in households’ disposable income.
The Bank of Israel today published the semi-annual report on the stability of the domestic financial system, and its analyses relate to events that took place until the end of December 2016. The publication of the Financial Stability Report is anchored in the definition of the Bank of Israel’s functions pursuant to the bank of Israel Law, 5770–2010—to support the stability and orderly activity of the financial system—and it is common among the central banks of advanced economies. The Financial Stability Report includes a survey of the risks to financial intermediaries at the center of the financial system—the banks and insurance companies—and of the risks to the nonfinancial business sector and to households. It also examines the financial system’s exposure to these risks.According to the Report, the domestic financial system maintained stability in recent months, against the background of the accommodative monetary policy in Israel and globally, and despite the gyrations in the financial markets. The banks and insurance companies remained stable: The banks continued the trend of accumulating and strengthening capital, the leverage level is adequate, the banking system is profitable, the downward trend in concentration of the credit portfolio and exposure to large borrowers continues, the rate of impaired debt is low, and there has been an improvement in liquidity. The profitability of the insurance companies declined during the period, mainly due to significant provisions for insurance reserves due to the continued decline in the yield curve. But in parallel, the insurance companies increased their recognized capital in order to meet the new repayment ability regime.
Home prices in Israel continue to increase, and in the 12 months ending in November 2016, they increased by 8.1 percent. It is common to assess pricing in the housing market by examining prices in relation to fundamental factors, particularly rent and wages or income. Compared to the past, these two indices are at peak highs.
Since the interest rate environment has been low for a prolonged period—a policy that is necessary in view of macroeconomic developments—and since it is having a prolonged effect on asset prices, the public and financial institutions are exposed to the risk of sharp declines in home and financial asset prices. Such declines may take place if major economies move into further recession or if their financial stability weakens, and may infect the Israeli economy through a negative impact on exports and financial asset prices. They may also take place if Israel’s geopolitical situation worsens and leads to an increase in the economy’s risk premium, or if shocks lead to a significant decline in households’ disposable income.
The risk of sharp declines in home prices is derived from the fact that the banks are characteristically highly exposed to mortgages and credit to the construction and real estate industry, as well as to consumer credit that is correlated with these other types of credit. A sharp decline in asset prices may lead to reduced economic activity and reduced consumption, a process that may have a negative impact on the entire Israeli economy. Such an impact may make it difficult for mortgage borrowers to meet their repayments or to sell assets in order to overcome the repayment difficulty.The increase in home prices in recent years took place in tandem with the decline in long-term yields and in mortgage interest rates. The yield on a dwelling continues to decline, and for the first time it declined to below 3 percent. In parallel, the yield on government bonds continued to decline more rapidly. As a result, the gap between the yield on owning a dwelling and the yield on government bonds widened. In contrast, the interest rates on mortgages increased recently, and it will act to moderate the pressure on home prices.
Financial Stability Report