The Bank of Israel does not rule out the possibility of a sharp rise, by a factor of more than ten, in the banks' credit losses as a result of the coronavirus pandemic. Nevertheless, the central bank says that it sees no threat to the stability of the banking system, even in the event of extreme conditions arising from a further substantial worsening of the economy.
Last week, the Bank of Israel released part of its Financial Stability Report for the First Half of 2020, from which it emerges that it estimates that under an extreme but not impossible scenario, the coronavirus crisis could lead to a rise in expenses for credit losses from less than 0.3% in 2019 to around 3.3% of the total credit portfolio, or in an even more extreme case to almost 4.7% of the portfolio.
Nevertheless, even if growth in credit losses of this order of magnitude eventuates, it will not endanger the stability of the system, according to the Bank of Israel.
The bank states in the report that "Clearly the scenarios we present are not superior to other scenarios, but the tool allows quick analysis - even if somewhat crude - of the sensitivity of the banking system to various levels of credit losses," in what the bank makes clear is not a real estimate.
If these extreme scenarios come about, and this is not the situation at present, then aggregate credit losses by the banks will be NIS 6-7 billion. Taking into account exceptionally high credit loss provisions in the first quarter of this year, amounting to NIS 2.9 billion, the Bank of Israel's extreme scenario means total credit losses as a result of the coronavirus crisis of the order of NIS 10 billion.
The banks not only raised their credit loss expense in the first quarter; they also gave relaxations to many borrowers, mostly in the form of deferral of repayments for a few months. In this context it is worth pointing out that although higher credit loss provisions do not necessarily entail a change in the amount of credit made available to the public, they generally do have a negative effect on the supply of credit.
The coronavirus crisis is far from being a financial crisis; in the Bank of Israel's view, even in the extreme scenarios mentioned above, which may not materialize, "the banking system remains robust." If the most extreme scenario does materialize, it is liable to cause of decline of 0.3-1.5% in the banks' capital adequacy ratios - a considerable decline, but not one that raises fears for the soundness of the system.
It appears that the Bank of Israel is not concerned about any particular bank, and the report states that in the event of the most extreme scenario, only some of the banks will fall below the regulatory minimum capital adequacy ratio.
Published by Globes, Israel business news - en.globes.co.il - on August 9, 2020
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