The Bank of Israel’s semi-annual Financial Stability Report published on Wednesday said the banking system remains stable but may be vulnerable to risks from a steep decline in home prices and financial assets.
“A macroeconomic stress test on the banking system shows that even if a serious recession were to take place in Israel, the banking system would maintain its stability,” the report said, pointing out that profitability and capital ratios of Israel’s leading banks grew in 2015.
“While the profitability of the insurance companies declined during the period, their recognized equity increased,” it said.
Regarding the housing industry, the BoI noted that “the risk of sharp declines in home prices is derived from the fact that the banks are characterized by high exposure to mortgages and to the construction and real estate industry.
“The risk of declines in the prices of financial assets is derived both from the possibility of a direct impact – through holdings of those assets – and from the possibility of an indirect impact, through the effect of these asset prices on firms’ abilities to repay loans they took out from banks and from institutional investors, due to the difficulty of selling many properties within a short time.”
The Bank economists also analyzed the relationship between the market and mortgages. “The lively activity in the housing market is affecting the rate at which mortgages are taken. This rate rose this year, with mortgages averaging NIS 5.25 billion a month over the past year, compared with NIS 58.3 billion over the preceding year (June 2014-June 2015). The risk indices for the new mortgages remained stable at low levels, but the interest rate on those mortgages rose.”