The Banking Supervision Department provided the banking system with a draft circular according to which the manner of measuring the industry-specific indebtedness limitation will change. Pursuant to the circular, credit risk for which banks acquired insurance from insurance companies abroad will be classified primarily in the financial services industry rather than the credit to the real estate industry. This change in classification will enable banking corporations to increase the supply of credit to the construction and real estate industry and to continue to finance important projects in it.
According to Banking Supervision Department directives, the share of credit provided by a bank to a single industry may not exceed 20 percent (and in some cases, 22 percent) of the bank’s total credit risk. This limitation is intended to prevent a situation in which a crisis in a specific industry endangers the stability of the banking corporation, and as a result, the stability of the overall economy. An increase in the scope of construction—actual and planned—in recent years, including within the framework of buyers’ price projects and of large infrastructure projects (such as military infrastructures in the Negev region in the south), led to the share of credit to the industry approaching the limit at a number of banks, which are thus limited in their ability to increase credit to the industry. This has led several companies in the real estate industry to report on financing difficulties.
Against the background of the abovementioned points, and particularly in view of the capital adequacy requirements that banks are required to meet, in the past year the banks executed a number of transactions at significant sums to acquire insurance policies to protect against the credit risk deriving from bank guarantees provided in accordance with the Sale (Apartments) Law (below, “sales guarantees”). The insurance policies were purchased from international insurance companies whose qualifications are recognized for purposes of calculating capital adequacy, in accordance with the international standards of the Basel Committee, and reduced those banks’ exposure to credit risks in the real estate sector.
In a draft circular issued yesterday for discussion in the Banking Supervision Department’s Proper Procedures Committee, the Supervisor of Banks announced that she is considering changing the classification of sales guarantee amounts for which the insurance was bought, so that 70 percent of the amounts will be classified in accordance with the main industry of the protection provider—that is, the financial services industry, and not the real estate industry. The recognition of credit protection is consistent with the Banking Supervision Department’s existing guidelines for calculating capital adequacy. The decision not to recognize the entire sale derives from the Banking Supervision Department’s intention to adopt additional measures in the future related to the method of measuring the exposure to industries (such as including credit facilities and other steps), which may increase the measured amount of banks’ exposure to a given industry.
Based on estimates of the Banking Supervision Department, the proposed regulatory change will reduce the share of credit to the real estate industry by about 1.5 percentage points (with some variation among banks), and will enable banks to increase their credit and to finance infrastructure development projects and residential construction projects by approximately an additional NIS 10 billion.
Supervisor of Banks Dr. Hedva 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.”