The Bank of Israel’s Financial Stability Report is published twice a year. In this report, Bank of Israel economists analyze exposure to the main risks to the financial system, and assess potential risk scenarios.  The assessments and analyses contained in the Report are based on a survey of developments during the reviewed period, an examination of structural changes, the use of analytical models, and assessment of the background conditions in the global and domestic economies.  The report outlines how the realization of risk scenarios may affect the financial system in the short and medium terms, with the aim of increasing awareness among policy makers and the general public and enabling proper preparedness.


The main findings in the report are as follows:


  • The Israeli economy has recovered from the COVID-19 crisis.  GDP is only slightly below the precrisis trend line; the labor market is tight and demand for workers is high; and the deficit steadily declined until it became a surplus in June.
  • Inflation accelerated in 2021, and since the beginning of 2022, inflation in the past 12 months was above the upper bound of the inflation target.  Until the beginning of July, the Bank of Israel increased its interest rate three times, to 1.25 percent.
  • ​The war in Ukraine is having a limited direct impact on the Israeli economy.  The indirect impact mainly passes through increases in commodity prices.
  • The financial conditions tightened in most large economies, and the risks to global growth increased due to the war between Russia and Ukraine, moving central banks around the world to tighten their monetary policy and leading to an economic slowdown in China.
  • The monetary tightening at a sensitive time, as many economies are still recovering from the damage of the COVID-19 crisis, poses a challenge to the central banks in balancing the need to restrain inflation with the need to enable continued economic recovery while maintaining financial stability.
  •  During the reviewed period, there were price declines on the securities markets, and interest rate spreads between corporate and government bonds increased.  This was due to the increase in inflation in Israel and globally, which resulted in higher interest rates, as well as the increase in geopolitical tensions.
  •  Home prices increased sharply in 2021, a trend which continued into 2022.  The ratio of the Index of Home Prices to the Index of Rental Prices also continued to increase.
  •  Credit to the business sector grew rapidly in 2021 and in the first quarter of 2022, led by bank credit, which expanded along with a decline in interest rates in the large and medium business segments.  The expansion of business credit continued in April and May of 2022, despite the increase in interest rates in all segments.
  •  An analysis of public company data shows that as of the date of the analysis, the indicators of business resilience point to a high level of strength and a low level of risk, which are reflected in some decline in leverage and an increase in repayment capabilities in most industries.
  • The increase in bank credit to the construction industry accelerated in the past two years, together with an increase in risk appetite.  Most of the growth in credit was to finance land purchases at high LTV rates and at prices that were higher than in the past, which show an expectation of continued increases in home prices.  During the reviewed period, the Bank of Israel issued instructions to the banks to strengthen their risk management, partly through additional capital allocations in respect of financing high-leverage land purchases.  The resilience indices (leverage and repayment capability) in the construction and real estate industry are lower than in the other industries.

  • The trend of expanding credit to households, both housing and nonhousing, continued alongside the increase in interest rates from March onward.  Credit quality, which is measured as the rate of credit in arrears and impaired credit, is good from a historical perspective.

o   The increase in mortgage borrowing was accompanied by an increase in LTV rates and in PTI rates.  About 15 percent of mortgages were taken out around the same time as a consumer loan.

o   About half of existing current account credit facilities were in overdraft in February 2022, and about one-quarter of total facilities were in prolonged overdraft.  These rates are lower than in the precrisis years.

  •  In recent months, the level of liquidity in the government bond market declined, similar to the developments in many countries.  This phenomenon is more moderate in the corporate bond market, while liquidity in the equity market remained steady.
  • The financial institutions, led by the banks and insurance companies, remained stable during the reviewed period, as their profits increased.
  • The main risk scenarios focus on moderate of global activity as a result of the tightening of monetary policy, which is necessary due to the increase in inflation; continued political uncertainty in Israel; and the decline in quality of initiated credit in the construction industry.​