"The main risk to the stability of the domestic financial system is in the high exposure of the banking system and of households to the housing market," observed the Bank of Israel in its second semi-annual Financial Stability Report published today.
The report, on the stability of the domestic financial system, covers events that occurred through the middle of December 2014.
The Bank of Israel observed, "The domestic financial system maintained its stability in recent months, despite a local security-related shock and a decline in growth rates, and a challenging global environment, characterized by greater uncertainty than seen in the first half of 2014. The report indicates that the two major risks to which the domestic financial system is exposed remain those that were specified in the previous report (from July 14, 2014), and provides an update on the developments in each one."
The Bank of Israel continued, "The main risk to the stability of the domestic financial system is in the high exposure of the banking system and of households to the housing market. While a slowdown in the housing market was seen in the second and third quarters, the number of transactions declined and the rapid price increases halted, it nonetheless appears that the slowdown derived from waiting for the implementation of various programs planned by the government. The delay in approving the plans, and the subsequent standstill in some of them due to elections being brought forward, led to renewed demand toward the end of the year. The banking system has considerable exposure to mortgages and to the construction and real estate industry, and homes make up a major share of the households’ asset portfolio. Thus, as noted in the previous report, the financial system is exposed to the risk of a sharp decline in home prices, which could result from a (domestic or external) shock that leads to a sharp and rapid increase in interest rates, or from a recession that negatively impacts on borrowers’ income. Either scenario, or some combination of both, is liable to make it more difficult for households and contractors to meet their obligations and thus would negatively impact on banks’ capital ratios."
The financial system is also exposed to underpricing of risks in the corporate bond market, against the background of the low interest rate environment in Israel and abroad, a factor that impacts on pricing in this market in particular, and in asset markets in general. Although after the previous report was published, the downward trend of corporate bond market spreads halted, spreads even increased in December, alongside a moderate increase in the yield gap vis-à-vis abroad - the level of the spreads remains low. At the same time, there was an increase in net funds raised by Israeli corporations and in the volume of bond offerings by foreign companies on the Tel Aviv Stock Exchange."
Published by Globes [online], Israel business news - www.globes-online.com - on January 21, 2015
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