Joint Conference of the Bank of Israel and the Coller School of Management of Tel Aviv University on Securitization as an Instrument for Increasing the Credit Availability in Israel
The conference was opened by Professor Michel Strawczynski, the Director of the Research Department at the Bank of Israel. He was followed by Professor Amir Yaron, the Governor of the Bank of Israel, who spoke about the financial system in Israel and the securitization tool.
In concluding his remarks, Governor Yaron explained, “The financial system in Israel is less developed than in other advanced economies, and in particular, the supply of credit in Israel is not large. Therefore, we are working to develop new markets and to remove barriers and distortions from the financial system, an effort that will increase the range of financing possibilities, will increase the efficiency in the allocation of credit and its pricing and will facilitate a more efficient distribution of risk among the financial institutions. One of the ways of accomplishing this is the securitization tool, which allows a more efficient and flow of credit, by means of shortening the financial intermediation process and reducing its cost. Therefore, we believe that the Securitization Law should be advanced in a responsible and prudent manner and in a way that will benefit the economy and minimize risk.”
The rest of the conference included a discussion by financial regulators and senior managers of the financial institutions. Attending the conference were senior members of the financial and regulatory systems and of academia.
Professor Dan Amiram, Vice Dean of the Coller School of Management of Tel Aviv University, who spoke after the Governor, explained that, “The Securitization Law should be adopted and quickly. There is widespread agreement among the regulators, the business sector and academics that the advantages of a developed securitization market are significantly greater than the risks, which indeed exist. A developed securitization market is one of the accepted indicators worldwide of an advanced financial system and Israel is well behind the rest of the world on this front. In my opinion, every day that goes by without a securitization market causes harm to the citizens of Israel.”
After his speech, Professor Amiram moderated a panel of senior managers that included Avi Sternschuss, the CEO of Midroog; Danny Vitan, CPA, partner and Head of the Professional Practice Department at KPMG Somekh Chaikin; Yaron Bloch, MAX Executive Chairman and senior advisor at Warburg Pincus Israel; Ran Oz, CEO of Migdal Insurance; and Shuki Burstein, CEO of Mercantile Discount Bank.
In a second panel, Micki Kahn, Head of the Bank of Israel Research Department’s Finance Division, hosted several financial regulators, including Yair Avidan, the Supervisor of Banks; Dr. Moshe Bareket, the Head of the Capital Market, Insurance and Savings Authority; Deputy Attorney General (Economic Law) Adv. Meir Levin, and Adv. Hanoch Hagar, Senior Advisor to the Israel Securities Authority Chairwoman.
Following are selected quotes from the participants of the panels:
ir Avidan, Supervisor of Banks: “A securitization transaction is an important tool for the development of the capital market, as a supplementary tool in the development of competition, together with the greater accessibility of customer information as part of open banking. Securitization makes it possible to transfer assets and risk to the capital market and to free up sources of financing in order to provide new loans to certain sectors. In this way, it has the potential to reduce the costs of financing sources and to make them more accessible to both banks and non-bank players and in turn to their customers. It increases credit access for small and medium-sized businesses and helps to diversify the investment options available to institutional investors. In order to do this properly, the securitization transaction should be tailored to the various types of investors, who vary according to risk appetite, and securitization should be limited to simple transactions with uniform characteristics, such as mortgages and car loans.”
Dr. Moshe Bareket, Capital Market, Insurance, and Savings Authority Commissioner: “We are of the opinion that the Securitization Law should be passed as quickly as possible, with the goal of expanding and increasing the sophistication of the domestic capital and credit markets and the supply of products they offer. We are aiming not only at the tradable market but the nontradable market as well. Our main goal is to expand Israel’s credit market and bring it to the standards prevailing in other countries. This is an important goal for both the economy and savers. The promotion and development of the market is expected to expand the scope of participation by institutional entities in the credit areas and will lead to the diversification of the instruments for the management and support of capital in the face of various short-term risks. Already this year, the Capital Market Authority has taken steps to prepare the way for securitization, as it updated capital requirements in line with those adopted in Europe and it has provided licenses to new players in the domain of credit services, with the goal of increasing competition. We will continue to work to upgrade the credit market in Israel by means of securitization and other channels.”
Deputy Attorney General (Economic Law) Adv. Meir Levin,: Increasing the sophistication of the financial market poses new and complex challenges with respect to the relationship between the various regulators and the overlap and interfaces between them. As part of the securitization legislation—and as in the case of other matters we are dealing with such as the open banking legislation, the payment services legislation and the regulatory sandbox for fintech companies—these challenges must be dealt with. Furthermore, problems arising from regulatory arbitrage, double regulation of the supervised entities, and lack of coordination between regulators—which will compromise the protection of the public and will be to the detriment of the supervised entities—should be avoided.”
Adv. Hanoch Hagar, Senior Advisor to the Israel Securities Authority Chairwoman: “A public securitization market that is developed along the right lines will make a significant contribution to the public capital market, with respect to both investors and issuers; however, in developing securitization it is important that the configuration of incentives will be correct, such that it includes mechanisms that provide appropriate protection to investors.
The protection mechanisms will include rules of disclosure and also directives of substance that will require the originator to bear part of the risk. Disclosure is important but there is also a need for additional measures to protect investors. We are seeing legislation in this direction in other countries, and therefore it will not be necessary to reinvent the wheel in this context.
This is particularly true in Israel because we are dealing with a new product for which there is not yet any experience with the pricing of risk and in some cases it takes time for investors to learn how to approach these investments. If a product is issued in the early stages of the market’s development that negatively impacts investors, it is liable to be labeled as high-risk and its growth will be delayed by a decade.
Therefore, our message is two-pronged: we are in favor of developing a public securitization market in Israel and we have invested a not insignificant amount of effort in this direction; at the same time, we intend to make certain that mechanisms to protect investors are firmly in place, based on, among other methods, regulatory directives.”
Danny Vitan, , CPA, partner and Head of the Professional Practice Department at KPMG Somekh Chaikin There is no doubt that securitization can increase the sophistication and diversify the access to credit in Israel while at the same time diversifying the investment instruments available to investors in the Israeli capital market. However, there are still a number of legal barriers (certainty with regard to the Securitization Law), regulatory barriers and taxation barriers (taxation on the level of the SPE) that need to be dealt with in order to encourage and facilitate the creation of this instrument in Israel and the development of the market.”
on Bloch, MAX Executive Chairman and Senior Advisor at Warburg Pincus Israel: “It is very important to continue developing and upgrading the Israeli credit market while diversifying the instruments and the exposures offered in it. Securitization, which is derived from the broader world of structured finance, already accounts for a significant portion of the global debt market and makes a major contribution to liquidity in that market. We at the MAX company will certainly know how to make use of it in the future; however, since we are an entity that was separated in the past from Leumi Bank and are under the supervision of the Supervisor of Banks at the Bank of Israel, we attribute major importance to our having access to the diverse sources of financing offered to the banking system.”
Avi Sternschuss, CEO of Midroog: “Securitization transactions are an important financial instrument in global capital markets. The development and regulation of the securitization market in Israel will certainly contribute to diversifying and expanding the channels for investment and saving for the investing public, while also creating an additional source of financing for small and medium-sized businesses. The rating companies have a major part to play in the securitization market, which involves the analysis and rating of credit risk and the repayment ability of the SPE. This analysis is an important factor in understanding the transaction and in the decision-making process of the investing public.”
Ran Oz, CEO of Migdal Insurance: “Securitization is a fundamental instrument in every advanced capital market. It enables efficient and relatively inexpensive access to asset-backed credit which constitutes an essential supplement to the traditional banking credit market. In this way, securitization reduces barriers and contributes to the growth of the real and private economy.”
During the conference, Dr. Oded Cohen, a researcher in the Research Department of the Bank of Israel, reviewed the findings on securitization in other countries: Essentially, there has been a significant drop in the level of securitization activity worldwide since the sub-prime crisis. Nonetheless, there is still a substantial amount of securitization. Thus, the balance of securitized credit not including mortgages—most of it provided to corporations—stood at 7 percent of GDP in the US at the end of 2020. In Europe, the balance of securitization varies widely from country to country. Thus, the balance of securitized debt in Denmark, Spain, Belgium, the UK, Portugal and Italy is about 10 percent of GDP while in Switzerland and Germany it is only about one percent of GDP. Dr. Cohen stated that most of the findings in the empirical literature support the claim that securitization leads to an increase in the supply of credit. This is through a number of channels, including: the reduced need for credit providers to maintain levels of liquidity on their balance sheets since securitization allows them to turn non-liquid credit into liquid credit with relative ease; and the distancing from regulatory capital constraints following securitization which enables the provision of new credit. In contrast, securitization is liable to incentivize credit providers to underwrite loans imprudently since the cost due to the realization of risk for these loans will be borne by the portfolio purchaser. Nevertheless, the literature indicates that regulation can require that some of the risk remain with the originator, which will mitigate the incentive to underwrite imprudently.”