Bank Chief Warns Against Overlending to Households

YERUSHALAYIM (Reuters) -

Israel’s central bank chief expressed concerns on Wednesday about the rapid growth trend in credit to households, saying the repayment burden could become harder to bear as the country’s economic expansion slows down.

Bank of Israel Governor Karnit Flug told the annual Herzliya conference the recent rise in lending to households “may lead to overleverage and an increased burden of repayment in the future.”

She cautioned that Israel’s economy is growing more slowly than in the past while operating in a near-zero interest rate environment with full employment.

“Possible changes in any one of these parameters, such as an increase in the interest rate or unemployment, may endanger the financial state of households and small businesses, and make it difficult for them to meet their obligations,” Flug said.

Israel’s economy is expected to grow 2.8 percent in 2016 and the central bank has held its benchmark interest rate at 0.1 percent for more than a year, with expectations of steady policy into 2017.

Flug also warned against implementing banking reforms too quickly, saying the stability of the financial system must be maintained in case of an economic downturn.

The central bank and the finance ministry agreed this week on reform that will ease conditions for the entry of new banks, while forcing Israel’s two largest banks – Hapoalim and Leumi – to sell their credit card businesses.

The aim is to spur competition to make credit cheaper for consumers and small businesses.

“We must remember that a collapse of a financial agent may cause contagion and a negative impact to confidence in other financial agents,” said Flug .

“For these reasons, it is important that increased competition in the credit market … be accomplished with caution, while paying attention to the developing risks and with proper supervision of the new credit suppliers.

“History proves that if we permit and even encourage the banking and financial system to engage in unlimited competition in favor of the profit line, the price paid by creditors, and the economy as a whole, meaning the entire public, is too heavy to bear,” Flug said.