The Banking Supervision Department announces a reduction in the banks’ capital requirements, and instructs them to examine the distribution of dividends in order to increase the supply of credit in the economy

 

  •  In view of the large growth of demand for credit in the economy since the outbreak of the coronavirus crisis, the Banking    Supervision Department is lowering the capital requirements of the commercial banks by one percentage point, thereby increasing the banking system’s sources for the continued provision of credit to households and the business sector.
  •  In addition, the Supervisor of Banks is instructing the banks’ boards of directors to re-examine their dividend distribution and share buy-back policies at this time.  This policy will free up additional sources for the banks so that they can provide credit and absorb losses if necessary.
  • These measures are consistent with the measures being taken by parallel regulators around the world since the outbreak of the crisis, and are based on the strong state of the banking system and its strengthening capital and stability in the past decade.

 

The banking system in Israel entered the coronavirus crisis in a strong position.  The banks have large capital surpluses, strong liquidity ratios, and high-quality credit portfolios.  Since the Global Financial Crisis in 2008, the Banking Supervision Department has worked to strengthen the capital and stability of the banking corporations by adopting advanced international standards, improving the quality and increasing the volume of capital, diversifying the credit portfolio, reducing exposure to large borrowers, and more.  Against this background, at the start of the current crisis, the Bank of Israel clarified its expectation of the banks to help with the provision of credit to households and businesses that have suffered negative impacts to cash flow and are expected to be able to repay the credit at the end of the crisis.

 

Since the outbreak of the crisis, demand for credit has increased sharply, and the risk level in credit provision has increased in parallel, in view of the impact to the financial state of businesses and households.  In order to ensure the banks’ ability to continue offering credit, the Banking Supervision Department announced a reduction of one percentage point in the regulatory capital requirement, so that the minimum Common Equity Tier 1 ratio[1] will be 9 percent at the large banks (compared with 10 percent currently) and 8 percent at the midsized and small banks (compared with 9 percent currently).  This decision is consistent with decisions made by parallel regulators abroad, and shall be valid for a period of six months (and will be extended for an additional six months if necessary).  Thereafter, the banks will be required to present a gradual path for reaccumulating the eroded capital over two years.

 

The reduction of the capital requirement is based on the designated capital buffer that the Banking Supervision Department required the banking system to accumulate for use during a crisis, and will erode a half of it.  This capital buffer—2 percent of each bank’s total risk assets—reflected the Banking Supervision Department’s excesss demand, beyond the framework of the Basel Committee—the body that sets the international banking regulation standards—in order to protect the banking system and the Israeli economy from unforeseen developments.

 

The Bank of Israel expects the banks to use the capital sources that have been released as a result of this leniency in order to increase credit to households and the business sector, with responsible credit underwriting and stringent risk management, with an emphasis on providing credit to customers who, prior to the outbreak of the corona crisis, were repaying their credit properly.

 

In addition, the Bank of Israel has instructed the banks’ boards of directors to re-examine their dividend and share buyback policies at this time, in view of the material change in economic conditions, and particularly the sharp decline in macroeconomic forecasts and the tremendous uncertainty.  This policy will free up additional sources for the banks in order to provide credit and absorb losses if necessary.

 

Bank of Israel Governor Prof. Amir Yaron said, “The reduction of the capital requirements expands the operating space of the banking system, which is now required to balance the need to provide for the demand for credit by customers negatively impacted by the crisis who can repay the credit, and the need to continue managing credit risks with the necessary caution and strictness.  An intelligent increase in the supply of credit will support economic growth and help the economy get through the crisis with a minimum impact, thereby contributing to strength of the banking system.”

 

Supervisor of Banks Dr. Hedva Ber said, “The maintenance of the stability and resiliency of the banking system, which we have insisted upon for years, has now turned out to be a strategic asset for the Israeli economy.  The banks are prepared for the economic challenges and the expected increase in borrowers’ credit losses, and their capital buffers and liquidity will enable them to cope with this challenging period.  We can and must allow ourselves to loosen some of the restrictions imposed during routine times, in order to enable the banking system to support businesses and households that have repayment ability, but have encountered difficulties as a result of the crisis.  With that, we call on the banks’ boards of directors to re-examine their dividend and share buyback policies in order to enable further growth of credit to the economy.  The Banking Supervision Department will continue to ensure that the stability of the banking system in general, and depositors’ money in particular, will be maintained.”

 

 

Leniencies in banking regulators’ capital requirements around the world due to the corona crisis

Leniency percentage relative to capital

Denmark (1 percent)

Germany (0.25 percent)

Iceland (2 percent)

Ireland (1 percent)

Norway (1.5 percent)

Sweden (2.5 percent)

Hong Kong (1 percent)

Canada (1.25 percent)

 



[1] Net of the additional capital buffer in respect of exposure to housing credit.​

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