Remarks by David Zaken, the Supervisor of Banks, to the Finance Committee

Regarding the considerations and authorities of banking corporations in providing credit and writing off debts

To view as Word doc​

In my remarks, I will deal with the granting of credit by the banking system, the issue of debt restructuring proceedings, and also the monitoring carried out by Banking Supervision Department.

Credit risk is one of the main focal points of risk for entities providing credit—both banks and non-bank entities. Therefore, the Banking Supervision Department, like other supervisory authorities worldwide, invests a great deal of effort in regulating the management of credit risk, in monitoring risk management at the banks and the way in which credit risk is recorded in a bank’s books, as I will discuss later. 
 

On the issue of the granting of credit by the banking system

In determining whether there is distortion in the system, we base ourselves on the data:

Total credit granted to the public by the banking system totals about NIS 860 billion (according to the balance sheets as of the end of 2012), of which total credit to the business sector accounts for about NIS 415 billion (of which about NIS 60 billion is to small businesses), total credit to private individuals accounts for about NIS 360 billion (of which about NIS 240 billion is in the form of housing loans) and credit provided to borrowers for activity abroad accounts for about NIS 86 billion.

In other words, about 48 percent of credit is provided to the business sector, about 42 percent to households and about 10 percent to borrowers abroad. It is important to stress that in recent years, bank credit has shifted from the business sector to the household sector, primarily to mortgages. In view of the growth in bank credit to households together with the changes in other characteristics of household debt, it should be taken into consideration that the phenomenon of debt restructuring proceedings is likely to spread to this sector as well.

In this context, there are two inter-related problems which we are dealing with:

1.    The concentration of credit provided to large business groups, which is the mirror image of concentration in the economy and is also reflected in non-bank credit.

The issue of concentration in the economy is being dealt with by the Concentration Committee and a draft of the law is before the Committee.

With regard to concentration of credit in the banking system – at the start of 2012, the restrictions on providing credit to borrower groups were tightened (from 30 percent of the capital base to 25 percent) and an overall limit was put in place, such that total credit to borrowers whose indebtedness is over 10 percent of the capital base shall not exceed 120 percent of the capital base.

2.    The supply of credit to the retail sector (households and small businesses) relies almost entirely on the banking system

We have already examined this issue as part of the investigation of competitiveness in the banking system. We concluded that the supply of credit to households and small businesses should be expanded. While large borrowers benefit from a broad supply of credit both from the banks and from institutional bodies, the retail sector is dependent almost entirely on the banking system.

The second issue I would like to discuss is debt restructuring proceedings in the banking system

The phenomenon of debt restructuring deals, which include “haircuts” of part of the debt, has been growing recently. As a result, there is increasing public criticism of debt restructuring deals which include write-offs, conceding on collateral or arrangements in which controlling shareholders do not pay a price for damage caused to lenders.

In this context, the basic assumption is that a loan should be returned to the last shekel and in a timely manner according to the terms agreed upon by the borrower and the lender. This is not an open question but rather the basis on which an economy is built.

There is also no question regarding the need to exploit every avenue in order to collect a debt, and this can also be done as part of debt restructuring proceedings, prior to legal action being taken to collect the debt.

The concern that non-relevant considerations affect debt restructuring is and will be investigated thoroughly—both from the perspective of the economy as a whole by the committee that the Minister of Finance and the Governor of the Bank of Israel have decided to establish, and that of each of the financial sectors, i.e., the banks, the capital market and institutional investors. The goal is to ensure that the economy is based on a broad range of solid and reliable credit channels, which will support economic growth.

In this context, it is important to emphasize the following:

•  The appointment of the committee is not in place of, and does not render superfluous, the specific examination by the Banking Supervision Department of the debt restructuring proceedings by Leumi. The Banking Supervision Department will continue to investigate this issue.
  
• Neither is the appointment of the committee meant to replace, or make superfluous, the drawing of conclusions by each of the regulators in their area of responsibility in order to improve the credit provision process, its management and if necessary the formulation of a debt restructuring deal to collect it.

I would like to make clear that entering into a debt restructuring proceedings is a legitimate process and part of proper credit risk management, both in the banking system and in the non-bank system. It should be remembered that debt restructuring is sometimes the first step in a company’s recovery process, which if it works will produce value for lenders, investors, employees and the economy in general. The alternative to a debt restructuring arrangement is bankruptcy which also has a price.

The problem lies in the growing frequency of debt restructuring deals over time and its effect on the payment ethic in the economy.

The third issue is the investigations carried out by the Banking Supervision Department

First, it is important to clarify that the Banking Supervision Department does not receive a report prior to a bank making a business decision and does not need to receive such a report. It does not grant a “pre-ruling” on decisions prior to providing credit or prior to signing on a debt restructuring deal. The board of directors and management of a bank are the ones who bear responsibility for the bank’s decisions and actions—so it has been until now and so it will continue to be.

The Banking Supervision Department’s function is to ensure the stability of the banks so that they will be able to meet their obligations to depositors; however, the Banking Supervision Department must not exceed its powers by managing the banks. Therefore, supervisory intervention exists, on an ongoing basis, in two cases:

1.    In cases where there is a fear of failure in the decision making process or when the decisions themselves are not rational and as a result there is harm to the bank, its reputation or the confidence of the public or its proper management. In such a case, the Banking Supervision Department will intervene and require a correction of the errors.

2.    Intervention in banking activity or in specific transactions, even before they have been carried out, which put the stability of the bank at risk. Such intervention is exceptional.

In any case where intervention by the Banking Supervision Department is called for, it is carried out only after careful consideration of all the processes involved, the circumstances at the time the decisions were made and the information that was available to decision makers. It is certainly possible that after such consideration, a bank will be forced to take steps other than the ones it decided on.

When providing credit, there will also be losses (provisions and write-offs) and also credit arrangement deals, since the provision of credit involves the management of risk, whether this involves a large borrower or a small or medium-size business or a different type of borrower, such as a household.

An examination of the allowance for doubtful debts in the banks’ books emphasizes the fact that credit risk is created not only through the debt of the business sector but also that of households. During the period 2010–12, the five large banks made provisions of an average of about NIS 3.2 billion per year for credit losses, which constitutes about 0.4 percent of outstanding credit.

It is worthwhile that the analysis of the quality of credit be done on an overall basis and over time. The results show that during the last seven years, the rate of credit losses in the banking system was about 0.5 percent on average per year while during the financial crisis in 2008–09 the rate rose to about 0.7 percent annually. This is in contrast to rates exceeding 1 percent in the banking systems of Western countries, evidence of the relative conservativeness of the banking system in providing credit.