As the coronavirus wreaks havoc on the economy, Israel is not facing a credit crisis: The banking system is stable and those who need to borrow to get through this time can get one, albeit at higher rates than before.
That’s the message Bank of Israel officials are sending. Lenders entered into the crisis in a strong financial state. They have passed the central bank’s stress tests, which include scenarios far worse than what Israel is experiencing now – for instance, a situation where the Tel Aviv Stock Exchange falls 50% and the economy shrinks 5%.
But with business turnover dropping rapidly amid a near lockdown of the economy, officials say that large and small businesses as well as households are seeking loans, as are both credit-worthy and less credit-worthy borrowers.
“Everyone who can is trying to make use of their credit line,” said one. “Good borrowers are making use of their entire line to increase their liquidity as a safety measure. Less good borrowers, including sectors that are in trouble due to the coronavirus, are asking to delay loan repayments and take out new loans.”
Officials say the demand has not overwhelmed the system, although this doesn’t mean that everyone seeking credit can get it.
“There’s no credit crisis, so the banks are helping them, but only when it’s a borrower who was in good shape before the crisis. Anyone who was in bad shape before will have a very hard time getting a loan right now,” one explained.
Israel’s banks have excess capital of about 14 billion shekels ($3.8 billion) that they can use for lending. In contrast to the 2008 global financial crisis, the banks themselves are not in any direct danger of failing, officials stress.
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Bank of Israel Governor Amir Yaron and Hedva Ber, the supervisor of banks, told the banks two weeks ago that now was not the time for them to reduce lending. If they do, they could cause businesses to collapse and leave the economy worse off, hurting the banks themselves in the end.
Another factor that has encouraged lending is the fact that deposits have grown since the onset of the coronavirus crisis. Investors have fled the plummeting stock market and put their money into banks.
In the mortgage market, the Bank of Israel remains confident. The ratio of outstanding home loans to gross domestic product in Israel is one of the lowest in the developed world and the average mortgage is worth just 52% of the property behind it. In practice, the figure is even lower because home prices have risen so much in recent years.
As to the economy as a whole and the role of the banks, central bank officials split their answers into two parts. They said there is no sign that credit markets are seizing up and that businesses and consumers can’t get credit. However, they said, the cost of credit has risen by 0.5-0.7 percentage points and will continue to rise. This is due to the rising rates in the capital markets and higher risk premiums.
“The longer the crisis continues, the more the banks will talk differently,” warned one.
“If this crisis comes to end, as in our baseline scenario, by the end of the second quarter, the banks will continue to supply the oxygen. The economy will recover. The banks will recover. Nevertheless, there will be an increase in loan losses,” said the official.
Meanwhile, data from credit card companies show major sectors of the economy are seeing sharp drops in turnover since the onset of the epidemic and the increasingly strict lockdown measures Israel is taking. In the tourism sector, the decline has been no less than 95% from before the virus struck. But it has also been severe in other sectors – in apparel retail, turnover is down 62% and in entertainment, it’s down 43%. However, food sales have jumped 25%.
Officials said commercial banks were cooperating by continuing to lend. “We’ve gotten positive feedback from the bank CEOs, including the most veteran of them, about the more holistic approach we have taken that says, ‘Lend to businesses and don’t reduce your lending exposure and go into the bunker. Don’t sit there and wait for [businesses] to declare bankruptcy,’” said one.
The Bank of Israel, in cooperation with the Finance Ministry, plans to set up a second loan fund for small and medium-sized businesses. The government will guarantee up to 10% of fund loans and up to 85% of individual loans. The first loan fund includes Bank Leumi, Mizrahi Tefahot Bank, First International Bank of Israel and Israel Mercantile Bank as partners. The other big banks – Hapoalim and Israel Discount – have asked to join the second fund.
The value of the two funds will reach 8 billion shekels, with loans aimed at helping borrowers get through liquidity crises created by the pandemic and the lockdown. Officials said they are making it easier for borrowers to get approval. For instance, instead of requiring a loan to be simultaneously approved by the bank and the government, for now only the bank approval is enough, and the government can give its okay afterward.
In the mortgage market, Ber, the banks supervisor, is encouraging allowing borrowers to delay repayment of the principal by three or four months, in line with each bank’s risk-management standards. A typical borrower who is paying 5,000 shekels a month would have as much as an extra 20,000 to help him or her through the crisis – savings that are essential for the hundreds of thousands of Israelis who have been put on unpaid leave.
“We’ve been hearing that there is a lot of interest in delaying principal payments on mortgages, thousands of people a day have been asking. Even good borrowers are asking,” said an official. “We’re also enabling the banks to grants loans for any purpose against a home up to a loan-to-value rate of 70%.”
Nevertheless, the Bank of Israel predicts that mortgage rates will rise from today’s average of 3.5% by 0.5-0.7 percentage points. For small businesses, commercial banks say they will rise a full percentage point, but for households, it will be a little less.