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The Supervisor of Banks publishes draft guidelines for housing and real estate loans—regarding the capital allocation and the allowance for credit losses in respect of housing loans, and a change in the risk weighting of guarantees under the Sale Law
The Supervisor of Banks, David Zaken, today published draft guidelines on issues relating to credit for housing (mortgages) and real estate, for consultation with the Advisory Committee on Banking Issues. The new guidelines are effective as of January 1, 2013.
The following are the main points of the new draft:
a. For the calculation of capital adequacy ratios, housing loans are weighted at 35 percent, except for leveraged housing loans with a variable interest rate component, which since October 2010 has been weighted at 100 percent. According to the new draft guideline, the capital allocation in respect of housing loans will be based on the following weights:
- Housing loans with a loan to value ratio of up to 45 percent—will be weighted at 35 percent for capital requirements (unchanged from current weighting).
- Housing loans with a loan to value ratio of between 45 percent and 60 percent—will be weighted at 50 percent for capital requirements (instead of 35 percent).
- Housing loans with a loan to value ratio of greater than 60 percent—will be weighted at 75 percent for capital requirements (instead of 35 percent or 100 percent, see below).
- At the same time, the requirement (from October 2010) of a 100 percent weighting for loans in which the loan to value ratio is greater than 60 percent, with a principal value of over NIS 800,000, and in which the variable interest rate component is 25 percent, will be changed, as noted above, and instead will be weighted at 75 percent.
b. The draft guidelines establish a requirement to increase the allowance for credit losses in respect of housing loans—so that the ratio between the group allowance and the balance of housing loans is at least 0.35 percent. At the end of the third quarter of 2012, this ratio was around 0.22 percent.
c. In addition, the draft guidelines establish a reduction in the capital allocation required in respect of Sale Law guarantees, in cases where the residential property has already been transferred to the buyer. These guarantees will be weighted with a credit conversion coefficient factor of 10 percent, instead of the current 20 percent. This change constitutes an easing of the capital allocation requirements and may increase the supply of bank credit to the construction and real estate industry.
The draft guidelines were established in light of the accelerated increase in housing credit in recent years (an increase of about 76 percent in the past 5 years), at the same time as an increase in housing prices. The goal of the guidelines is to increase the capital buffers and required allowances in respect of the increase in risks inherent in the housing credit portfolio. At the same time, the measure eases capital requirements in respect of Sale Law guarantees after the home has been transferred to the buyer, because of the relatively low level of risk inherent in them.
The Supervisor of Banks, David Zaken, said, "The directives noted 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. At the same time, they enable banks to increase the supply of credit to the construction industry."