1. What is the purpose of the step taken by the Bank of Israel?
The purpose of the directive is to ensure that the banking system allocates sufficient and appropriate capital cushions against the risks inherent in the housing credit portfolio and its weight in the total banking credit portfolio, thereby strengthening the ability of banking corporations to absorb unexpected losses and strengthening financial stability as a whole.
The continuous growth in the housing credit portfolio in banking corporations, and in the weight of the housing credit portfolio in the total banking credit portfolio, in recent years, has been accompanied by an increase in the risk inherent in this portfolio, mainly in light of the correlation between the risks inherent in the housing credit portfolio and the credit portfolio for the construction and real estate industry, and between the housing credit portfolio and the consumer credit granted to households.
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2. The Bank of Israel has taken steps in the past that require additional capital allocation. Doesn't another step in this area indicate that the Bank of Israel's previous steps on the subject failed in their goal of increasing capital buffers?
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Some of the previous steps in the housing credit sector were intended to increase the capital cushion of banking corporations for unexpected losses, and reflected risk assessments at the times they were taken.
In light of the ongoing increase in housing credit, and in particular its share in the total bank credit portfolio, and the concern about the increase in risks in this portfolio, there is a need to continue to work to gradually increase the capital cushions in banking corporations.
3. Only two years ago did the regulator announce a plan to adjust the capital adequacy ratio. Is there no inconsistency in this regulation towards the banking system?
The adjustment of the capital ratios required of banking corporations and their adequacy to the risks inherent in banking activities, changes and developments in the business environment is continuously reviewed. Therefore, the current step constitutes a consistent continuation of previous steps taken by the Banking Supervision Department regarding capital requirements, both Basel 3 and specific steps taken in connection with housing loans.
4. The Banking Supervision Department's stress scenarios have shown that the banking system is resilient and stable, and even in stress scenarios, stability is not expected to be undermined. Why, then, are these measures required?
The stress scenarios conducted by the Banking Supervision Department indeed showed that the banking system in Israel is capable of withstanding significant economic shocks. However, the scenarios showed that one of the main risk focuses stems from the high level of exposure to housing loans. Since the level of exposure is on a continuing growth trend, the current step is intended to maintain a high level of robustness in the near future.
5. What does the new draft directive stipulate?
The draft directive states that, beyond the targets set by the Supervisor for the core capital ratio for banking corporations (9% by 2015, and 10% by 2017 for the two largest banks), banking corporations will be required to gradually increase the core capital target by a rate that reflects 1% of the housing credit portfolio balance.
6. When is the directive scheduled to come into effect? And what does the gradual implementation until 2017 mean?
The effective date for meeting the capital target set in the draft directive is January 1, 2017, when implementation will be gradual. The gradual implementation allows banks to carry out proper capital planning to achieve the target, and to implement the directive without making sharp changes in their conduct.
7. How is the measure expected to affect the capital requirements of the banking system?
The measure is expected to increase the capital cushions of the entire banking system by approximately NIS 2.7 billion, which constitutes an increase of approximately 0.3 percentage points in the Tier 1 equity ratio. The impact of the measure is expected to differ between banking corporations depending on the size of their housing credit portfolio:
8. Does the draft directive mean that the regulator will once again prevent banking corporations from distributing dividends to shareholders?
Banking corporations are required to meet the capital targets, as set out in this directive and by the specified implementation date. To this end, they must operate subject to proper capital planning, which takes into account, among other things, the implications of distributing dividends on their ability to meet the specified target.
9. Does the measure mean that banking corporations are not managing their housing loan portfolio wisely? In particular, do they not hold sufficient capital cushions for the risks inherent in the housing loan portfolio?
Banking corporations operate in accordance with their internal risk assessments and the directives of the Bank Supervision Authority. Experience worldwide shows that crises in banking systems often develop as a result of banking corporations' exposure to housing loans and the real estate sector, and especially against the backdrop of an accelerated expansion of the volume of housing loans. It also appears that assessing the risks inherent in these exposures is particularly complex, mainly against the backdrop of the fact that housing market crises occur relatively infrequently and the repayment history of housing credit borrowers is good compared to other loan portfolios.
10. The state of provisions for credit losses is very good from a historical perspective and by international comparison. Why are these loans being feared now?
The growth in the housing credit portfolio in recent years has not been accompanied by a parallel increase in provisions for credit losses. This step is a continuation of previous steps taken by the Banking Supervision Department regarding provisions for credit losses and, like them, works towards adjusting the provisions to the growth in the risks inherent in the housing credit portfolio.
11. How is this measure expected to affect the homebuying public? Is the measure expected to make taking out new mortgages more expensive? If so, by how much?
The purpose of the measure is to strengthen the resilience of the banking system and its ability to withstand the materialization of risks, for the benefit of depositors, investors, and the public as a whole. The impact of the measure on the mortgage borrowers depends on a large number of factors, including: the bank's ability to absorb the cost of the increase in mortgage prices without passing it on to customers, the customer's bargaining power with the bank, and more. For example, the Discount, Union, and Binlaumi banks already meet the capital increase requirements. In this context, we note that the housing loan market is characterized by relatively high competition. In any case, the measure does not discriminate against certain groups in the population.
12. Is the measure expected to affect customers who took out a mortgage before the directive was published?
The measure is not expected to affect customers who took out a mortgage before the date of publication of the directive.
13. Are additional restrictions planned on housing credit?
The Banking Supervision Department continues to monitor developments in the housing credit portfolio in the banking system. If necessary, additional steps will be considered.
14. Does the Banking Supervision Department see a development of risks to stability in the context of the increase in credit to private individuals other than for housing, as mentioned in the draft directive?
The growth rates of credit to individuals other than housing are high and its weight in total credit has increased in recent years. There is a correlation between the quality of this credit and the quality of housing credit through factors that affect both types of credit. For example, an increase in unemployment and a deepening recession are expected to harm both consumer credit and housing credit.
