The stability of Israel’s banking system would not be in danger in the event of a macroeconomic shock such as a housing crisis, but banks would nonetheless be significantly affected, the Bank of Israel said Sunday.
The central bank said it conducted a stress test to determine lenders’ ability to absorb losses without endangering their stability or the public’s deposits. Using 2018 data, the test examined the banks’ resilience to geopolitical events leading to higher interest rates, combined with a severe housing crisis and the collapse of a large business group.
“The results of the test show that the scenario will have a considerable impact on the banking system and although some of the banks will suffer losses, the scenario does not threaten the banking system’s stability and resilience,” the central bank said, noting that Tier I capital ratios are not expected to fall below the required 6.5% minimum for extreme scenarios. “The banks’ capital ratios in the scenario are higher than those in previous stress tests.”
Bank stress tests were put in place globally after the 2008-09 global financial crisis, which left many banks and financial institutions severely undercapitalized or revealed their vulnerability to market crashes and economic downturns. Israeli banks could be vulnerable as they have stepped up lending in recent years as home prices have soared. The Bank of Israel began conducting annual stress tests in 2012.
“Rising unemployment, the decrease in GDP and the housing crisis make it difficult for households and the business sector to meet their obligations, which causes serious losses in the banks’ credit portfolio and damage to their equity,” the central bank said.
The Bank of Israel said most of the losses expected in the stress scenario would be in the banks’ loan portfolio — an average of 12.2 billion shekels ($3.4 billion) a year, or 1.2% of the total. Losses may be mitigated by higher interest rates, which would boost net interest income, it added.
The central bank said the results attest to the stability of banks even in an extreme situation and reflect the requirements placed on banks in recent years in order to strengthen their capital.
“Although this extreme scenario shows that the system can maintain its stability, we are not complacent,” the Bank of Israel said. “The system is also exposed to other risks that have intensified in recent years, including cyber and technology, and the system’s stability must be examined in that context, too.”
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