The five large banks can only extend NIS 47 billion in credit to the business sector, NIS 23 billion less than the estimate published two months ago by the Supervisor of Banks, an analysis prepared by one of the banks indicates. There is no apparent problem in credit to households.
In 2000-2001, credit lines grew by 11 percent (NIS 48 billion). If the demand for credit this year were to grow similarly, the banks would be unable to meet the demand. But in the first quarter of 2002, the severe recession kept the demand stagnant.
While the analysis of the banks supervisor was based on the financial results of 2001, the current estimate uses data for the first quarter of 2002 (data for Q2/02 has not yet been released). In effect, the credit crunch is even more severe, if the banks maintain their policy of keeping a safety margin above the minimum 9 percent capital adequacy ratio (CAR is a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures).
Most of the credit can be extended by the two large banks, Hapoalim and Leumi. The three medium-sized banks, Israel Discount Bank, United Mizrahi Bank and First International Bank of Israel, can extend practically no credit to the business sector.
The shortage is most notable in loans that are linked to foreign currency. The banks now find it hard to secure off-shore credit lines of their own, because of the geo-political situation and the concern that the local banks' credit rating may be downgraded. As a result, the banks have raised the interest on foreign currency loans.
To alleviate this distress, the Bank of Israel announced yesterday that it would gradually reduce the secondary liquidity ratio requirement on the banks' foreign currency by 1 percent every month until it reaches zero in 10 months' time. Secondary liquidity ratio is the relationship between the amount of liquid assets a bank holds and their total deposits.
The existing requirement is a relic of the 1970s, designed to stop the banks from using all of their foreign currency resources for credit lines and to force them to deposit these reserves in the central bank or off-shore, as a further cushion for their primary liquidity ratio (also known as cash ratio, the relationship between the amount of cash a bank holds and their total deposits).
The banks are to deposit 10 percent of their foreign currency deposits in the central banks or in foreign banks. To date, $2 billion are thus deposited with the Bank of Israel. Within 10 months, this amount will be available to the banks to extend as credit.
The monetary department in the Bank of Israel said that this change is consistent with the policies practiced by most central banks, which now lean less on liquidity ratios as a monetary policy tool. The change will put Israeli requirements on par with those in other Western countries, in which the liquidity ratio is set in reference to the term of the deposit and not in reference to the category of the depositor or the deposit.
No revisions will be made in the primary liquidity requirements, the central bank said. Liquidity ratio for deposits of up to six days is 6 percent, for deposits of seven days to one year is 3 percent, and nil for anything else.
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