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Israel Stress Test Shows Banks’ Stability Not in Danger

avatar by Reuters and Algemeiner Staff

An Israeli flag flutters outside the Bank of Israel building in Jerusalem, Aug. 7, 2013. Photo: Reuters / Ronen Zvulun / File.

The stability of Israel’s banking system is not in danger in the event of a local macroeconomic shock such as a housing crisis, but banks nonetheless would be significantly affected, the Bank of Israel said on Sunday.

Israel’s banking regulator said it conducted a stress-test for the banking system to determine whether banks would be able to absorb losses without endangering their stability or the public’s deposits.

The test examined the resilience of banks to geopolitical events that would lead 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.

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“The banks’ capital ratios in the scenario are higher than those in previous stress tests.”

Most of the losses expected in the stress scenario would be in the credit portfolio — an average of 12.2 billion shekels ($3.4 billion) a year, or 1.2 percent of the portfolio.

“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 regulator said.

Losses may partly be mitigated by the 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.

Last week, Bank of Israel Governor Amir Yaron said that despite the central bank’s efforts to maintain banking stability “we must not be complacent. We must continue thinking of where the next crisis may come from, and continue monitoring and strengthening the system’s resilience.”

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