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The plunge of Lehman Brothers' stock in New York on Tuesday sent global markets reeling and caused an uproar in the Israeli financial world too. The question on everybody's lips was whether Israeli financial institutions, mainly the banks, would be damaged in the fallout. Analysts addressed that question yesterday and generally concluded, no. At least not in the immediate future.

Bank shares in Tel Aviv did lose ground yesterday, but not much.

All Israel's banks are exposed to the New York investment bank, says Leader Capital Markets analyst Alon Glazer. That said, analysts generally feel that the degree of the local banks' exposure to Lehman is not high - tens or a few hundreds of millions of dollars. Only the banks know for sure and they don't have to disclose the composition of their proprietary investments.

"Exposure" in this context means investment in Lehman stock or bonds, holdings in structured instruments that it issued, credit derivatives linked to Lehman or derivative transactions connected with it (usually through instruments that hedge bets on foreign currency or interest rates).

That last is apparently the main way Israel's banks are exposed to Lehman, which is a huge player in options to speculate on currencies or interest rates.

Conversations with bank managements and perusal of the banks' financial statements led Leader analyst Glazer to conclude that the total exposure is on the higher side of hundreds of millions of dollars. But that doesn't necessarily mean that they'll lose all their money invested in or through Lehman Brothers, he points out.

If Lehman Brothers were to collapse, Glazer says, the pain would spread over here beyond the banks to the insurance sector and other financial institutions. But even if Lehman were to fall, that doesn't necessarily mean that products it had marketed would be affected. It does mean that the risk is greater.

Also, Glazer points out, the fall of a giant like Lehman would accelerate the snowball of the global credit crisis. It would trigger a panicked selloff of financial assets and real estate properties, which would depress prices.

Terence Klingman, head of the research department at Excellence, notes that since the credit crisis broke out in mid-2007, Israel's banks have been reducing their exposure to the American investment banks, including Lehman.

Deposits at investment banks aren't insured like deposits in retail banks, and Israel's banks generally avoided investment in their financial instruments, he says.

Klingman doesn't believe the Israeli banks' exposure to Lehman is greater than $200 million.

Yuval Ben-Zeev at Clal Finance is not worried about losses at Israel's banks due to Lehman; what has concerned him is the quality of risk management at the local banks. He believes the banks slashed their investments in Lehman in recent months, limiting their exposure to the tens of millions of dollars.

"I wouldn't rush to adopt an apocalyptic view, though there's no doubt that there is risk," Ben-Zeev says. But he adds that if the banks had proper risk management, they would have reduced their Lehman exposure to a minimum.

Banks Hapoalim and Discount had the biggest investments in credit-default swaps (CDS), including ones based on Lehman bonds, at the end of the second quarter. Hapoalim wrote in its quarterly report that its investment in credit-based derivatives amounted to $680 million at the quarter's end, and that most of the underlying assets were bonds issued by big banks, including Lehman, Merrill Lynch and Morgan Stanley.

But sources close to the bank said last night that Hapoalim's exposure to Lehman-based CDS is only $15 million. Bank Leumi's exposure to Lehman-based CDS is estimated to be about $15 million to $20 million.

At the second quarter's end, Discount's exposure to corporate bonds, including of the big banks, amounted to $560 million.

Meanwhile, the local Lehman branch, which has been operating in Israel for 50 years, will stay in business, says its manager Len Rosen.