Update of the banking system’s limitations on the Construction and Real Estate industry

Supervisor of Banks Yair Avidan: “Easing the limitations on the provision of credit to the construction, real estate, and infrastructure industries will enable the economy to better recover following the crisis.  We estimate the potential for growth of credit to these industries as a result of the measures being taken at about NIS 18 billion.  This credit can be obtained by companies in the industry and support the economy as part of a group of measures being taken by the Bank of Israel to support the economy on the financial level in view of the COVID-19 crisis.  The limitations are being eased following an examination of the existing industry concentration risks and, in view of a Banking Supervision Department examination of the use of insurance against credit risk with the aim or reducing the existing risk.”

 

With the aim of supporting the continued activity of the construction and real estate industry in view of the economy’s emerging needs during and following the crisis, and after having examined the risk of concentration in the industry, the Supervisor of Banks has seen fit to revise the industry limitation of the construction and real estate industry as follows:

 

  • The leniency in the temporary order enabling the banks to increase exposure to the construction and real estate industry from 20 percent to 22 percent (excluding national infrastructure) has been extended by five years to 2025;
  • The limitation on exposure to the construction and real estate industry (including national infrastructure) has been increased by 2 percentage points (the limitation benchmark has been increased from 24 percent to 26 percent of the total credit portfolio).
  • Credit in respect of which qualified credit insurance has been issued will be classified by insuring industry.  Thus, for purposes of measuring the industry limitation, credit to construction and real estate that is covered by qualified credit insurance[1] will be deducted from the industry indebtedness of the construction and real estate industry.

These measures are intended to enable the continued financing of the construction and real estate industry, and support economic growth and continued business activity.

 

In view of the lengthening of the COVID-19 crisis, alongside an examination of the economy’s emerging needs following the crisis, and based on an assessment of concentration risk in the banking system, the Supervisor of Banks has seen fit to extent the leniency in the temporary order, while also easing the total exposure limitation on the construction and real estate industry during this period.  The revision means an effective easing of the industry limitation on the construction and real estate industry by 2 percentage points (from 24 percent to 26 percent) beyond the industry limitation benchmark currently in place, for a period of five years.

 

In recent years, the banking corporations have carried out a number of transactions, of significant amounts, to purchase insurance policies in order to protect them against credit risk in the construction and real estate industry.  These policies were purchased from international insurance companies whose fitness has been recognized for the purposes of calculating capital adequacy in accordance with the international standards published by the Basel Committee.

 

In view of the accumulated experience with insurance, and consistent with the guidelines for calculating capital adequacy, the Supervisor of Banks is allowing the banking corporations that purchase insurance against credit risk to classify the credit against which credit insurance is purchased in accordance with the main activity segment of the insurance provider.  This revision completes the amendment made a few years ago, and enables the banks to recognize the transfer of risk to the insurance provider’s industry in respect of insurance of sales guarantees at just 70 percent.

 

According to Banking Supervision Department estimates, the potential growth of credit to the industry resulting from these measures is about NIS 18 billion (in terms of the limitation, about 2.3 percentage points with some variance between the banking corporations).  Furthermore, the recognition of qualified credit insurance for industry limitation purposes may increase the banks’ motivation to insure credit, minimize credit risk in some projects in the industry, and further increase the supply of credit to the industry.

 

It should be emphasized that the easing of the industry limitation does not exempt the banks from providing credit to the construction and real estate industry in accordance with exacting risk management, bounded risk appetite, and according to conservative credit underwriting rules as in any other credit provision process.  Furthermore, reinsurers will be used cautiously and in accordance with the credit policy outlined by the Bank’s Board of Directors.

 

A draft directive has been published today for public comments, and is attached to this press release (in Hebrew).  It is expected to take effect immediately upon completion of the required processes.


[1] Insurance policies issued by international insurance companies with a high credit rating, the fitness of which is recognized for the purpose of calculating capital adequacy in accordance with the Basel rules (which fulfill the required legal and operational conditions).