Overlapping credit portfolios and multiple lending in the Israeli banking system
- The banks’ credit portfolios are liable to contain overlapping credit as a result of exposure to joint borrowers. This phenomenon creates a channel of linkage through which a shock that is unique to a particular bank may cross over to other banks and become systemic.
- The Israeli banking system does not have a significant volume of intentional overlap (syndication transactions), with most of the overlap being unintentional (de-facto syndication). Such overlap is created, inter alia, due to the regulatory restrictions of a single bank’s exposure (restricted exposure to a borrower, group of borrowers, or industry), since the regulations force borrowers with large credit needs to borrow from a number of banks.
- The likelihood that a bank will provide credit to a borrower that has received credit from other banks increases with (a) the extent of the bank’s interaction with the borrower’s business, whether through existing loans to a group of borrowers to which the borrower belongs, or through acquaintance with the industry in which the borrower operates, and (b) the extent of overlap between the bank’s asset portfolio and the asset portfolio(s) of the other lending bank(s).
- An analysis of the data on large credit exposures between 2005 and 2015 shows that while overlap between the banks’ credit portfolios in Israel has declined, it remains significant.
A box written by Dr. Konstantin Kosenko, Noam Michelson and Tal Sido in the forthcoming Financial Stability Report analyzes the overlapping of credit portfolios among the banks in Israel.
The mutual relationships between the banks are potential channels for the transmission and intensification of risks, and for making those risks systemic. The Financial Stability Division of the Bank of Israel Research Department monitors the development of such relationships. The attached box outlines the methodology the Division uses to examine the extent of overlap in the banks’ credit portfolios in Israel, which is one of those channels, and presents the main findings. The analysis is based on reports of large credit exposure reported to the Banking Supervision Department on a quarterly basis between 2005 and 2015.
The extent of exposure is determined according to the similarity between the banks’ loan portfolios. The similarity increases as the loan portfolios of the various banks contain more loans issued to the same companies. The more significant these loans are in terms of their size, the larger the extent of similarity or overlap is between the banks’ loan portfolios.
The analysis shows that similarity in the loan portfolios of the banks in Israel declined in recent years, but that the extent of exposure to common borrowers remains significant. The similarity between the loan portfolios is created from the demand of large companies for credit in order to finance their operations, which cannot be provided by a single bank, for instance due to regulatory restrictions on exposure to a single borrower, group of borrowers, or industry. In addition, a bank’s preparedness to be a lender to a borrower who has already borrowed from another banks depends, inter alia, on the following factors: the bank’s acquaintance with the borrowers field of operations, meaning the industry in which the borrower operates, or with other companies that are part of the same group of borrowers to which the borrower belongs; or the bank’s preference to loan to a company that has already borrowed from a bank with a similar asset portfolio composition, a phenomenon that is also found in similar studies abroad (“love for correlation”).
The overlap of asset portfolios creates an interconnectedness within the financial system, through which a shock that is unique to a particular bank or to a relatively large borrower intensifies and spreads throughout the system, becoming a systemic risk. The extent and intensity of the spread depend on the extent of the interconnectedness and the intensity of the initial shock. The analysis of overlapping portfolios and interconnectedness provides the Bank of Israel with another tool to monitor and analyze the development of risks in the financial system and their effect on its functioning.