Full report (Hebrew)

  • In the last year, the
    financial system in Israel continued to maintain its strength and strengthen
    its stability against the background of the low interest rate environment and
    supportive macroeconomic conditions—a higher growth rate than in the previous
    four years, a decline in the unemployment rate, and the expansion of private
    consumption.
  • The financial system’s
    exposure to the housing market continues to pose the main significant
    risk.  However, in recent months, there
    has been some apparent moderation in activity and in the pace of price
    increases, and if this continues, it will lower the risk.
  • Against the background of
    the high liquidity in the markets and the search for returns, the yield spreads
    on corporate bonds continued to decline, to all-time lows.  Furthermore, there was a significant increase
    in the volume of bond issuances, and mutual funds recorded significant net new
    investment and increased their share of the bond market.
  • The continued growth in
    consumer credit to households exposes them to the risk of default as a result
    of a worsening in economic conditions. 
    The realization of this risk will have a negative impact on the
    financial system to a certain extent. 
    Competition in the industry is expected to increase, which may lead to
    further growth of this credit.

 

The
Bank of Israel today published the semi-annual report on the stability of the
domestic financial system.  The
report analyzes events that took place during the first half of 2017.[1]  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 its
strength and continued to strengthen its stability against the background of
the low interest rates and supportive macroeconomic conditions—a growth rate
higher than the average of the previous four years, a decline in the already
low unemployment rate, and expansion of private consumption.  With that, an assessment of the systemic
risks to the economy shows that the financial institutions and households
continue to be exposed to the risk of a possibility that there may be a sharp
decline in home prices.  Housing credit
and credit to the construction and real estate industry as a share of total
domestic credit to the nonfinancial private sector increased from about 37
percent in 2008 to about 52 percent in 2016, although the growth rate moderated
significantly in the past year. 

 

The risk is increasing in view of the large exposure to nonhousing
consumer credit, which is highly correlated to housing credit.  In the event of a shock leading to a sharp
increase in the interest rate or a significant negative impact to borrowers’
income, with a sharp decline in home prices, it may have an effect on the stability
of the financial system, and particularly the banking system within it.

 

However, in recent months, there has been some moderation in activity in
the housing market.  This is apparent in
the more moderate pace of home price increases, some decline in the volume of
residential housing transactions for both new homes and second-hand homes, a
significant decline in investors’ share of housing transactions, and a
continued decline in the number and volume of mortgages issued each month since
June 2015.  The factors that have
apparently influenced the decline in activity include the increase in mortgage
interest rates, against the background of the regulatory measures instituted by
the Banking Supervision Department, and the taxation measures adopted to rein
in investors—the increase in purchase tax and the taxation of third apartments.[2]  A continuation of the apparent moderation in
activity in the real estate market and in the pace of housing price increases in
recent months will lead to a decline in the risk level of the financial system.

 

In addition, the report shows that the continued significant increase in
nonhousing credit to households may expose the financial system to credit risks
on the part of households, particularly if the upward trend continues as a
result of, inter alia, the reform being implemented due to the Increased
Competition in Banking and Other Financial Services Law.  This reform, which includes a number of
measures intended to increase competition in the credit market, is expected to
change the structure of the market, and may significantly increase credit to
households, as well as debt repayments.

 

Against the background of the high liquidity in the markets and the
search for returns, the yield spreads on corporate bonds continued to decline,
reaching all-time lows.  There was also a
significant increase in the volume of bond issuances, and mutual funds recorded
significant net new investment and increased their share of the bond
market.  The high corporate bond prices
expose the financial system to a greater risk of a turnaround in the trend
accompanied by a sharp decline in prices. 
A scenario that would lead to a turnaround in the trend of corporate
bond prices will also lower the cost of shares.

 

There has been high growth in the import and sale of new vehicles, and
the issue of financing such purchases has attracted a lot of attention, both
because of household exposure to this industry and due to business sector
exposure.  Since 2008, the rate of new
vehicle purchases by private customers has increased at the expense of
purchases by corporations and rental companies. This has led to a diversion of
financing for this activity from business credit to household credit, as
households leverage themselves through bank or nonbank loans, including from
the leasing companies, in order to finance the purchase. However, the direct
effect of difficulties in this industry would be limited and would not
constitute a prudential risk to the entire financial system, even though
exposure in 2016, particularly of the credit card companies, but also of the
banking system and the institutional investors, was not negligible. The total
exposure of the financial system to this credit area in the third quarter of
2016 was NIS 39 billion.


[1] The
data are up-to-date to varying degrees based on their availability at the time
of publication.

[2] As of
the date of the Report, the Supreme Court is discussing appeals concerning the
legislative process of the Multi-Dwelling Tax Law.