The Supervisor of Banks today published draft guidelines for consultation on the subject of development of risks in respect of housing loans, including a requirement for an additional allowance in respect of housing loans that were granted with a high LTV ratio.
The guidelines were established against the background of macroeconomic and industry-specific processes that are causing price increases in the housing market in many areas of the country, beyond increases in the standard of living and in household incomes. These processes are reflected in both an increase in the quantity of loans and in the average size of a loan, and are liable to cause extended erosion in the quality of housing credit portfolios and increased risk in the overall portfolio.
Within the framework of the new guidelines, banking corporations are required to examine the risk management in housing credit, as well as to set aside an additional allocation in respect of housing loans that were granted with a high LTV ratio.
The guidelines require that banking corporations re-examine the risks in the existing credit portfolio, as well as policy in the mortgage area to verify that it is not leading them to take greater than desired risks. The examination must refer to various characteristics of housing credit, and to include, among other things, the execution of stress scenarios of various severities, in order to examine the possible deterioration due to the erosion of the ratio between the credit and the value of the mortgaged asset, and in respect of changes in borrowers’ repayment abilities.
The guidelines also establish that a banking corporation is to examine the need to increase the allowance for doubtful debts in respect of the increase of risk in housing loans, and is to hold an additional allowance, of not less than 0.75 percent, in respect of balances of housing loans extended from April 1, 2010 for which the LTV at the time the credit was extended (the ratio of the loan to the value of the mortgaged asset) was greater than 60 percent. As noted, the requirement of the additional allowance will apply from the financial statements for June 30, 2010 and onward.
The Banking Supervision Department intends to continue and monitor the risk in the industry, and to examine the need to adopt further measures, as necessary.