During the first half of 2018, the domestic financial
system continued to maintain stability.
- An analysis of the environment in which the domestic financial system
operates and its level of robustness shows that it remains stable. This has improved over the years, supported
by the economic environment and the positive business cycle enjoyed by the
Israeli economy.
- While the Israeli economy has enjoyed a good macroeconomic state, as
well as the ability to withstand shocks, assessments
are that there is greater likelihood of an economic or geopolitical shock
originating abroad that could have a negative impact on real and financial
activity in Israel.
- In the first half of the year, the long period of almost constant price
increases in the financial markets came to an end. There were sharp declines globally, with
Israel following, and increased volatility during the first part of the period,
but the trend changed later on.
- The increasing spreads of corporate bonds somewhat mitigated the
economy’s exposure through the asset price channel, but the increasing
volatility and the tendency toward price declines on foreign markets—inter alia
against the background of the monetary tightening adopted by central banks—as
well as the marked declines of spreads in recent years, increase the likelihood1
that the recent increased yields are the beginning of change in trend in the
global financial markets, which may worsen and have an impact on the domestic
capital markets.
- The Israeli economy’s most conspicuous vulnerability is the housing
market, in view of developments in this market in recent years.
- The slowdown in the housing market has a marked impact on public companies
in the residential construction industry, and led to a decline in the volume of
sales and to an increase in the stock of unsold homes. Stress tests that were examined for variables
such as home prices, sales and interest rates show that the effect on the
financial leverage and immediate liquidity of the companies is significant only
at the extreme values, while the effect is relatively slight at the lower
values.
- An examination of the financial state of households as an aggregate
shows that it has not changed significantly from the previous half-year. Most
of the nonhousing credit, which stands at 15 percent of GDP, is issued by the
banks, but there is increasing activity on the part of other entities (credit
card companies and nonbank entities) that provide credit.
- The increasing availability of nonbank credit increases the financial
risk of households that take out such credit, mainly those in the lower
deciles. Since these households account
for a relatively small share of overall debt, this does not constitute a risk
to the financial system, although there is a risk to the households
themselves. It should also be remembered
that the pricing of credit by lenders is based on partial information (until
the Central Credit Register becomes operational).
- Looking long-term, the strength of most industries in the business
sector has improved. This is reflected in the improved financial ratios and in
other indicators of the public companies.
- The improvement in the banking system’s resilience continues, and was
reflected in 2017 in the continued accumulation of capital and in its
composition, in the continued high quality of the credit portfolio, and in
liquidity coverage ratios that are higher than required.
- All of the insurance companies met the capital adequacy requirements
set out in the Solvency II transition directives, but not all of them are
meeting other targets.
There are two boxes being published in the Financial
Stability Report:
1.
The financial strength of the Israeli economy vis-à-vis abroad.
2.
An analysis of the financial stability of public companies in the
residential construction and development industry.
* The publication of the English version Financial
Stability Report for the first half of 2018, and of the boxes included therein,
is forthcoming.