Supervisor of Banks Hedva Ber has distributed a draft circular to the banks changing the system for measuring the restrictions on credit by sector. Credit risk against which the banks have contracted policies from overseas insurance companies will be classified mainly as financial services credit, instead of real estate credit. This change will enable the banks to increase their supply of credit to the construction and real estate industry and continue financing important projects in the sector.
According to regulations issued by the Bank of Israel Banking Supervision Department, the proportion of credit granted by a bank to the individual households sector is limited to 20% (22% in certain circumstances) of the bank’s total credit. This restriction was designed to prevent a crisis in a specific household sector from jeopardizing the bank’s stability, and thereby that of the economy as a whole.
The planned and actual increase in construction in recent years, including large-scale buyer fixed price projects and infrastructure projects (such as military infrastructure in the Negev), have brought a number of banks near the permitted credit proportion threshold. They are limited in their ability to increase their credit to the sector, causing real estate companies to report a credit crunch.
In view of this problem, and especially given the capital adequacy requirements that the banks must meet, in the past year, the banks have made a number of substantial deals for acquiring insurance policies covering their credit risk from bank guarantees given according to the Sales (Dwellings) (Assurance of Homebuyers Investments) Law. The insurance policies were purchased from international insurance companies recognized by the Basel Committee for international standards for purposes of calculating capital adequacy, and have reduced the exposure of these banks to real estate credit risk.
In the circular sent yesterday for discussion by the Banking Supervision Department Proper Conduct of Banking committee, Ber announced that she was considering a change in the classification of the amounts of the sale guarantees for which insurance was purchased, so that 70% of these amounts would be classified according to the main activity of the party providing the hedge, in other words as financial services, instead of real estate. Recognition of credit hedges is consistent with the Banking Supervision Department’s existing instructions for calculating capital adequacy. The decision against full recognition of the sale is because the Banking Supervision Department intends to take measures in the future concerning the calculation of exposure to the household sectors (such as including lines of credit, etc.), which are likely to raise the banks’ exposure to this sector.
The Banking Supervision Department estimates that the proposed regulatory change will lower the proportion of real estate credit by 1.5% (with some difference between the banks), and will enable the banks to increase their credit and finance infrastructure and residential construction projects by NIS 10 billion.
Ber said, “The update of the directive is seen in a reduction in exposure to the construction and real estate industry, which the banks executed in the past year through the purchase of insurance against the sales guarantees they issued. The update will enable the banks to continue financing large infrastructure projects that are important to the economy and an increase in the supply of residential projects, which the Ministry of Finance and the government are leading with the goal of moderating the increase in housing prices. The purchase of insurance policies and the alignment of regulatory directives allow an increase in supply of credit to this important industry, while maintaining the risk limitations that were established by the Banking Supervision Department to maintain the stability of the banks and of the financial system.”