BoI: US poses risk to Israel's financial stability

Karnit Flug  photo: Eyal Izhar

The Bank of Israel's Financial Stability Report is concerned about the increasingly fragile political situation in the US.

A rise in the political risk in the US and record levels on world stock and bond markets are the main risk factor for financial stability in Israel's economy that have increased in the past six months according to the Bank of Israel, led by Governor, Dr. Karnit Flug, in its six-month financial stability report published today.

"The main risk stems from our belief that the political situation worldwide has become more and more fragile following a culture of foci of tension. If the political risk is realized this could strengthen falls on markets and bring them to a level that could pose a risk to stability."

The main focus of the higher political risk, according to the Bank of Israel report, is the US. "The political risk in the US continues to rise, and seems to be coping with both external and internal challenges. On the international level there is the tension with North Korea (war), China (trade war) and Russia (both of these), and internally there is the debt ceiling, which has paralyzed government, the exceptional tension between Republicans and Democrats, and more."

In contrast to the worsening situation in the US, the report speaks well of Europe. "as of this period, it seems that the political risk in Europe continues to fall. Europe has successfully and easily gotten through challenging election campaigns, events which contained risk but now don't seem to pose a source of immediate risk."

however, the report does see the weakness of the European banking system as a risk, reflected in the lowering of Deutsche Bank's rating and the IMF's assertion that a third of important European banks have not adapted their business model to the changing reality and are not stable enough.

On the domestic front, the exposure of the Israeli economy to a sharp downturn in the housing market remains high, according to the Bank of Israel The Bank of Israel defines a crisis in the housing market as a steep and rapid fall in housing prices, and believes that it will cause a shock in most economic sectors.

The Bank of Israel classifies the risk of a steep and rapid fall in housing prices as "medium-high" in the short and medium term. "The housing market trend continues to feature stability in recent months," the economists write, explaining that on the one hand, the number of new homes purchased has grown, but that total deals remain low because investors are leaving the market. The downtrend in mortgages is also continuing.

The Bank of Israel economists write, "If housing prices fall rapidly and steeply, households are liable to cut their current consumption."

The Bank of Israel explains that a drop in housing prices will increase the loan-to-value (LTV) ratio, thereby forcing households to reduce their leverage. One macroeconomic result of lower leverage will be tougher credit terms in the economy. A fall in housing prices will decrease investments in construction.

Published by Globes [online], Israel business news - www.globes-online.com - on January 22, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Karnit Flug  photo: Eyal Izhar
Karnit Flug photo: Eyal Izhar
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