Israel's Banks Told to Set Aside $730m for Mortgage Risk

New Bank of Israel requirement will primarily affect Mizrahi Tefahot and Bank of Jerusalem

Bloomberg

Israel’s banks will have to set aside 2.7 billion shekels ($730 million) in extra capital to cover enhanced mortgage risk, the Bank of Israel said on Sunday, confirming an earlier draft directive.

The new capital requirement, which goes into effect gradually until 2017, will have a pronounced effect on Mizrahi Tefahot Bank and Bank of Jerusalem, where mortgages account for a larger proportion of their lending than at other banks.

The tougher capital requirements come amid concern at the Bank of Israel that Israel’s banks are too exposed to home lending so that a sudden downturn in the economy or real-estate market, or a sharp rise in interest rates, might leave them carrying dangerously high levels of bad debt. The new requirements are that they have capital equal to 1% of the outstanding mortgage loans.

The new rules come on top of its general demand for enhanced capital requirements in line with the international Basel III requirements. Those demand that the big two lenders – Bank Hapoalim and Bank Leumi – increase their capital adequacy ratio to 10% while the smaller banks increase theirs to 9%.

However, side by side, the central bank also eased terms of highly leveraged mortgages in which the loan exceeds 60% of the value of the home being purchased, so that the bank will only have to allocated 75% of the capital rather than 100% as in the past.

Terence Klingman, banking analyst at Psagot Brokerage, estimated that Mizrahi Tefahot would have to add 740 million shekels capital to its balance sheet to meet the new requirements. That, however, is 200 million shekels less than if the Bank of Israel hadn’t eased terms for highly leveraged loans.