The five largest Israeli banks' exposure to overseas financial institutions is estimated at $50 billion. This sum makes up about 18% of their balance sheets, or about NIS 960 billion at the end of the second quarter, according to estimates from one bank. Between 60% to 70% of the exposure is in deposits in foreign banks and foreign government bonds. The rest is in riskier securities, including bonds of foreign banks.
The banks, along with the supervisor of banks in the Bank of Israel, have been working hard in the past few weeks to assess the local banking system's exposure to overseas financial institutions, in the wake of the global financial crisis. The crisis has radically changed the view of foreign institutions being the safest investments, because famous giants such as Lehman Brothers have collapsed and others such as Merrill Lynch and AIG have proved not to be immune to the crisis. And it is now clear they are not alone.
However, another Israeli bank says the exposure is more limited, closer to $25 billion. The difficulty in making the estimates comes from the problem of estimating the other banks' exposure. The banks have been moving to reduce this exposure in recent months; one sign is the $1.1 billion rise in the banks' foreign currency deposits with the Bank of Israel in September, seemingly a sign the banks are withdrawing their funds from overseas banks and depositing them with the Bank of Israel.
It should be noted that not all this exposure is necessarily at risk, even if risk levels have risen significantly in recent months. It seems Israeli banks have diversified their foreign holdings in many different types of securities, and some such as Fannie Mae and Freddie Mac bonds have seen their risk levels drop after they were nationalized. Bank Discount invested NIS 10 billion in such securities.
The banks looked to deposit money overseas not only to diversify, but also because in general interest rates were higher abroad - even if the risk was also higher, especially in complex financial products. While the banks have been required to report their foreign exposures to Supervisor of Banks Rony Hizkiyahu, he has chosen not to release the information, possibly for fear of panicking the public. However, TheMarker has learned that Hizkiyahu is considering ordering the banks to publish such information in their financial reports.
Want to enjoy 'Zen' reading - with no ads and just the article? Subscribe todaySubscribe now