Banks' minimum capital adequacy to rise

The Bank of Israel intends to raise the banks' minimum capital adequacy by 1% beginning in 2010 in order to comply with the second pillar of Basel II - The New Basel Capital Accord of the Basel Committee on Banking Supervision: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. The banks must meet the new threshold within two years after its comes into effect, i.e. by the end of 2011.

The directive means that the banks will have to increase their shareholders' equity by at least NIS 9 billion over the next two years in order to meet the new capital adequacy threshold. The banks are currently NIS 4 billion short of achieving the present capital adequacy threshold of 12%. This means that the banks will find it difficult to increase the amount of credit in the economy during 2010 as well, unless outside capital is injected into them by shareholders or through the issue of deferred notes on the capital market.

The Bank of Israel has ordered the banks to meet a 12% capital adequacy ratio by the end of 2009. At this date, the Basel II guidelines will come into effect, and banks must present capital adequacy ratios on the basis of the new rules. The adoptionof Basel II will reportedly reduce the banks capital adequacy ratios by at least half a percentage point, resulting in an average capital adequacy ratio of 11.5% for the banking system.

The Bank of Israel has now ordered the banks to raise this ratio by another 1%, to an average capital adequacy ratio of 12.5% for the banking system, in order to comply with the second pillar of Basel II.

Published by Globes [online], Israel business news - www.globes-online.com - on January 19, 2009

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