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The Bank of Israel is tightening restrictions on bank financing for corporate takeovers, Supervisor of Banks Yitzhak Tal announced yesterday.

The new rules, which are effective immediately, are due to the worsening economic situation and the consequent increased risk inherent in nonrecourse loans, in which the only collateral is the acquired stock and the bank has no option of collecting payment from the borrower himself.

According to the updated instructions, a loan issued for the purpose of acquiring control of a company may not exceed 70 percent of the banking institution's equity (down from the current 100 percent) if the loan constitutes more than 50 percent of the purchase price (down from the current 70 percent). The central bank said that none of the commercial banks were currently in violation of the new instructions.

The central bank also tightened restrictions on financing for takeovers of banking corporations. Tal ruled that in cases where a loan exceeds 30 percent of the acquisition price of a controlling share in a bank, it may not exceed 5 percent of the bank's equity.

Until now the limitation had applied to deals in which the financing exceeded 50 percent of the price. Some banks are currently in violation of the new instruction, and they will have to comply with the new regulations within a certain period of time.

Tal also stated that in light of difficulty of determining the value of acquired corporations and collateral, banks must conduct an independent valuation and take potential drops in value into consideration, rather than relying on valuations by parties related to the acquired company or the borrower.

Tal noted that instructions on this matter, which were first published in 1998, were issued due to the complexity and high level of risk involved in financing takeovers in which credit repayment is based on regular cash dividends from the acquisition.

He therefore emphasized that banks' managements and boards must carefully examine policy in this matter and determine safety margins and appropriate exposure limitations, with the Bank of Israel instructions serving only as a guide to the highest possible exposure, not as an alternative to management decisions.