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To the Hebrew Report - Introduction

To the Hebrew Report - Chapter A

To the Hebrew Report - Chapter B

Global and domestic economic activity continued to present challenges to Israel’s banking system in 2013. Against the background of the continued slow and fragile global economic recovery, Israel’s GDP grew by 3.3 percent, with weakness in exports, a slowdown in growth in investment, and improvement in the labor market. Likewise, interest rates remained low and the increases in home prices continued in 2013 as well. In this environment, the banking system continued to display resilience and stability—its core capital ratio increased, reaching 9.4 percent at the end of 2013, and the return on capital was 8.7 percent, similar to the long term average.

In recent years, the banking system has been in a process intended to strengthen the adequacy, level and quality of its capital. The Banking Supervision Department and the banking system are advancing the process in accordance with the recommendations of the Basel Committee on Banking Supervision, and in a manner similar to how it is being advanced in other banking systems around the world, within the framework of implementing the lessons learned from the global financial crisis. Beginning on January 1, 2014, banks in Israel are implementing the Basel III framework recommendations related to capital adequacy, with the Banking Supervision Department monitoring the implementation and following the undertaking. At the same time, the Banking Supervision Department and the banking system are preparing for the gradual implementation, beginning January 1, 2015, of the Basel III liquidity coverage recommendations. These processes strengthen the stability of the banking system, a necessary condition for continued proper functioning of Israel’s economy and the security of the public’s deposits.

This year the Banking Supervision Department continued monitoring the development of risks faced by the banks and assessing the manner in which they identify and manage them. The exposure to credit risk was emphasized—primarily the risk deriving from the state of large borrowers in the economy, and exposure to the construction and real estate industry. Past experience teaches that it is actually when indices are pointing to a bull market that extra attention needs to be placed on the proper classification of credit as well as on allowances and suitable reserve buffers. It is important to emphasize that in accordance with measurement and disclosure regulations, the allowance for credit losses needs to reliably reflect all the expected losses in the credit portfolio, even if they have not yet been identified.

In order to better understand the focus points of risk to which the banking system is exposed, and to examine its resilience to crises, the Banking Supervision Department conducted stress tests on the basis of a uniform scenario, and integrated the banking system into the process. The results of the tests indicate the main focal points of risks in the banking system’s activity—credit to the construction and real estate industry and housing credit, leveraged credit, and the concentration in the credit portfolio—as well as the sensitivity of the securities portfolios to changes in interest rates and stock prices. The results also indicated that the banking system is relatively robust, due to measures taken over the years to strengthen the capital adequacy.

Against the background of the continued increase in housing prices and in credit for housing, and in continuation of steps taken by the Banking Supervision Department in recent years, the Banking Supervision Department took additional steps during the reviewed year which were intended to reduce the risk to borrowers and lenders. In March 2013, guidelines were issued, the goal of which was to increase the capital buffers and the group allowance for credit losses, in respect of the increased risk in the housing credit portfolio. In August 2013, limitations were placed on the variable interest rate share of a housing loan, and a prohibition was placed on granting housing loans with a payment to income ratio of greater than 50 percent, and housing loans with a term to final payment of more than 30 years were also prohibited. Along with these steps, the Banking Supervision Department instructed banks to ensure proper underwriting processes and a higher level of disclosure to customers, with the goal of reducing the risks, to both borrowers and lenders, inherent in housing loans. With that, both borrowers and lenders are still exposed to the realization of risks in cases of changes in economic conditions, including employment and interest rates.

This year, the Banking Supervision Department emphasized the continued implementation of the recommendations from the interministerial Team to Examine Ways to Increase Competitiveness in the Banking System, recommendations which were intended to promote competition in the system and which were published in March 2013. The Banking Supervision Department acted to implement the recommendations that are within the Bank of Israel’s area of authority and to advance legislative amendments required to do so. Its activity centered on increasing fairness in the relations between banking corporations and their customers, and in particular in bolstering the strength and position of households and small businesses as customers receiving financial services from the banks: the Banking Supervision Department worked to formulate a comprehensive periodic report to the customer (banking ID) in order to increase the efficiency of disclosure to customers, and the formulation of guidelines which will ease the transfer of debit orders from one account to another and to open accounts via the Internet.

In addition, the Banking Supervision Department works to advance the infrastructure for the entrance of a new participant in the banking industry and to support the setting up of credit unions or banking cooperatives, in accordance with the business, competitive, and legal reality in Israel.

The Banking Supervision Department also acted in the areas of fees and customer activity in securities: it required banks to include in their management services a basic track for current accounts which does not cost more than NIS 10; it cancelled securities deposit management fees for makam and money market funds; it instructed banks with regard to repricing security purchase and sale commissions; it set a maximum commission for the purchase and sale of securities; and increased transparency in regard to the discounts that banks extend to their customers.

In recent years, banking regulation was tightened worldwide against the background of failures revealed in it in the past. International standards are developed accordingly and increasing expertise is required to deal with risks. Furthermore, countries around the world are conscientious in cross-border compliance and they use means of enforcement abroad, through increasing cooperation between their supervisory authorities. Banks in Israel need to meet the international standards and to cooperate with other countries in order to advance and be among the leading banks of the world. This poses a challenge to the banking system and requires it to improve the risk assessment processes, including setting up broad information and reporting infrastructures, setting up advanced credit rating systems, and more. Overcoming business continuity risks and cyber threats also requires continued appropriate preparedness.

The Banking Supervision Department worked this year to improve the banking system’s preparedness for emergency situations. As part of that, it is formulating a draft amendment to the banking order regarding dealing with bank resolution, in accordance with legislative changes worldwide, taking into account recommendations of the IMF, and with consultation and cooperation with government ministries and other supervisory authorities in Israel.

The banking system deals with challenges that originate in a changing risk environment: moderate economic activity, enhanced and cross-border enforcement, increasing competition alongside increasing supervision on consumer aspects and public sensitivities to the prices of banking services. This situation is liable to lead to increased appetite for risk and to seeking out high risk business opportunities. Against the background of the fragile recovery of the global economy, it is important that the banking system continue to be managed in a conservative and thought-out manner—through improved management of risk, corporate governance, and control—and concurrently to take significant steps to increase efficiency. Improved operational efficiency will allow the banking corporations to maintain both adequate profitability and a high level of service and fair price to the customer.

The Banking Supervision Department will continue to act to maintain the stability of the banking system, to increase the competition in it, to advance the fairness in relations between banks and their customers, and to improve the services provided to customers, in a manner which will strengthen the public’s trust in the banking system.
David Zaken
Supervisor of Banks