The Bank of Israel presents: What will happen to the banks in the event of a global recession?
The Bank of Israel examined the banking system in Israel in light of a scenario of a global slowdown and a high inflation environment.
Since this scenario is not so unreasonable, you will be happy to know that in the opinion of the central bank, the system is strong.
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Wednesday, 25 May 2022, 09:11 Updated: 10:02
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This morning, the Bank of Israel publishes an annual review of the Israeli banking system.
Already at the beginning of the review,
the Supervisor of Banks, Yair Avidan
, notes that in accordance with world practice, the Banking Supervision Authority also conducted a macroeconomic stress test for the banking system in the past year, based on a uniform scenario.
The extreme scenario that the bank values is not very different from reality: According to the bank, the scenario was characterized by a global shock, which is reflected in a sharp slowdown in economic activity and falls in world and Israeli markets, along with rising global and Israeli interest rates due to high inflation.
Due to the similarity to the existing economic reality at the Bank, it is noted that the scenario is not a forecast, but a hypothetical scenario designed to examine the resilience of banking corporations to various crisis conditions and their vulnerabilities.
The bank also noted that the scenario was carried out under the assumption of a "dynamic balance sheet", so that it also examines throughout the scenario the effects of the increase in the credit portfolio and public deposits.
This assumption has opposing effects, as it works on the one hand to increase interest income by increasing the balance of credit and the increase in credit works on the other hand to increase risk assets, which are one of the significant factors in impairing capital ratios throughout the scenario.
The test results indicated that the banking system is expected to continue to maintain its resilience and stability even in the economic situation examined.
No banking corporation falls below the minimum level of capital required in an extreme scenario by the Supervisor of Banks (Tier 1 capital ratio of 6.5%). The extreme scenario.
The results indicate that an increase in inflation and interest rates leads to an increase in net interest income in the banking system, due to the excess of indexed assets over indexed liabilities that exists in it.
However, this increase makes it difficult for borrowers, including mortgage borrowers, and leads to an increase in credit losses in the bank credit portfolio.
Similar to past scenarios, credit losses are the ones that constitute the main source of damage to capital ratios, with high expenditure rates recorded in all sectors of the economy throughout the scenario.
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The banking system in Israel is stable and, according to the Bank of Israel's forecast, will remain so even in the event of a global slowdown (Photo: ShutterStock)
Regulatory changes to improve financial services
Another issue under review relates to changes in banking services, such as:
Bank-to-bank transfer in a click
- to ease barriers to customer transfers between banks, a new system was launched last September that allows banking system customers to switch from bank to bank online, conveniently, securely, without Cost and within 7 business days.
Another service is
the establishment of a banking computer
services bureau - the banking computer services bureau is an infrastructure for providing computer services to financial entities.
The establishment of the bureau was a complex technological project designed to remove a significant barrier to the entry of new players, by significantly reducing the costs of establishing a new financial body in the banking market in Israel and thereby contributing to increased competition in the banking market and improved customer service.
The Supervisor of Banks, Yair Avidan (Photo: Reuven Castro)
The changes in the past year
Beyond the changes already mentioned above the most significant changes for customers in the past year were:
Entry of new banking players
- A regulated process has been defined designed to produce regulatory certainty for entrepreneurs considering setting up a new bank.
The process is intended to allow the receipt of a limited license for the bank, which allows for a limited activity of granting credit and receiving deposits, and this is before the operational, managerial and regulatory preparation of the new bank is completed.
The main barriers identified and addressed in recent years have been high capital requirements, information barriers, the need for branch deployment, technology barriers and regulatory uncertainty.
Another significant change that has taken place in the past year is the
mortgage transparency reform
- the Bank of Israel has promoted a comprehensive change in the mortgage field, designed to assist borrowers in the mortgage taking process in three significant aspects: transparency and comparability, simplicity and understanding and efficiency.
The change is expected to take effect in August and focus on making improvements at three points in time: at the stage of clarifying the conditions for obtaining loans from banking corporations;
At the stage of obtaining the approval in principle for a loan;
And throughout the loan period, as part of the viability of loan refinancing.
Bank of Israel