The Bank of Israel expects a large increase in credit losses for banks, plus a huge need for an immediate increase in the supply of credit to the public. Outgoing Supervisor of Banks Dr. Hedva Ber therefore announced today the dramatic step of reducing the required capital adequacy ratio for the banks. According to today's instructions by Ber, the minimum capital adequacy ratio for the banks will be cut by 1%. The Bank of Israel wants the capital released to the bank by this order to be used immediately to grant credit to the public.
In order to ensure this, the Bank of Israel is ordering a halt in the distribution of new dividends and the continuation of plans for buying back the banks' shares, such as Bank Leumi's plan. The order applies to dividends that have not yet been announced; what has already been announced will be distributed. The Bank of Israel wants to ensure that the capital released will be used to boost credit in the economy by tens of billions of shekels.
The current tier-1 capital adequacy ratio requirement is 10% for the large banks and 9% for the medium and small-sized banks, while the overall capital adequacy ratio requirement is 13.5% for the large banks and 12.5% for the medium and small-sized banks. The new tier-1 requirements will be 9% for large banks and 8% for medium and small-sized banks, while the overall capital requirement will be 12.5% for large banks and 11.5% for medium and small-sized banks.
The Bank of Israel Banking Supervision Department said today, "The lowering of the capital requirement is based on the special capital reserve that the Banking Supervision Department required the banking system to accumulate for use in a crisis, half of which will be eliminated. This capital reserve, which amounts to 2% of each bank's risk assets, constituted an addition requirement by the Banking Supervision Department beyond the working framework of the Basel Committee on Banking Supervision, which sets the international standards for banking regulation. This additional requirement is designed to protect the banking system and the Israeli economy against unexpected developments." The measure highlights, not for the first time, that the Bank of Israel has already realized that the current situation is an extraordinary crisis requiring exceptional intervention - something that other governmental agencies took more time to realize.
The measure is an extraordinary one, because the capital reserve was designed to ensure the banks' stability in emergencies. At the same time, the central bank decided that the capital reserve should be reduced, because if the banks continue providing credit, financing oxygen, to companies in order to get through the crisis, it will reduce the number of bankruptcies in Israel and make it easier for the economy and borrower businesses to recover. This will support the banks, which in the end will post fewer losses on credit.
A source involved in the new measure explained that in his opinion, the Bank of Israel's idea was that "The banking system is sound, and has very high capital levels, and lowering the capital adequacy ratios will make it possible to maintain the banking system's stability at the current time. In addition, the Bank Supervision Department's call for the banks to use this capital to provide new credit was designed to help the economy." This point was also raised in a letter sent by Ber to the heads of the banks, in which she called for granting credit to private individuals and businesses.
The Bank of Israel stated that the measure was similar to measures taken around the world; other central banks lowered the capital adequacy requirement, with reductions ranging from 0.25% in German to 2.5% in Sweden - putting Israel in the middle of the scale.
A number of banking system sources said that requests for credit had jumped since the crisis began. They said, "We have seen that many businesses have already utilized their lines of credit from the banks even before the crisis in order to utilize liquidity." As far as is known, the Bank of Israel sees a de facto increase in credit in the economy, especially for large businesses, while there is also a considerable increase in credit for small businesses and private individuals. "There is also a large growth in performance in mortgages, which were exceptionally large this month, because the public hurried to use a mortgage to close deals, while a slowdown in demand for mortgages was expected," an informed source said.
Published by Globes, Israel business news - en.globes.co.il - on March 29, 2020
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