The Bank of Israel publishes its financial statements for 2016
Financial statements (Hebrew)
· The Bank of Israel’s financial statements were affected in 2016 by a number of trends in the global economy, by the Bank of Israel’s monetary policy and by the foreign exchange reserves investment policy. The balance sheet grew by about NIS 25 billion (7 percent) to about NIS 394 billion at the end of the year.
· The vast majority of assets in the Bank of Israel’s balance sheet are denominated in foreign currency, while liabilities are mostly denominated in shekels: makam, shekel deposits by the commercial banks and outstanding banknotes and coins in circulation. The increase on the assets side is mostly attributed to an increase in the foreign exchange reserves, which was mainly a result of foreign exchange purchases by the Bank of Israel, profits and price revaluations, which were partly offset by negative exchange rate differentials on the balances, mainly as a result of the shekel’s appreciation against the dollar, euro and pound.
· The weakening of the euro and pound against the shekel was the main factor in the loss in 2016, while the effect of the weakening of the dollar did not contribute to the loss but was offset by the revaluation accounts in accordance with the accounting principles customary at the Bank of Israel, as common at central banks.
· In recent years, profits on the foreign exchange reserves exceeded expenses in respect of monetary tools, mainly due to the narrowing of the interest rate gap between Israel and the economies in which the reserves are invested, and changes in the investment policy on the foreign exchange reserves. In 2016, the main contributing factors to this were the increase in profits in respect of investment in securities, as well as the decline in the volume of makam issuances and the decline in the Bank of Israel interest rate from an average of 0.12 percent in 2015 to an average of 0.1 percent in 2016.
· In 2016, the upward trend in the volume of investment in shares abroad continued. Investment in shares and corporate bonds increased at the expense of government bonds. Over time, investment in corporate bonds and shares is expected to continue increasing the return on the reserves portfolio, but with an increase in the volatility of profits.
The Bank of Israel’s balance sheet totaled about NIS 394 billion at the end of 2016, an increase of about NIS 25 billion (7 percent) compared with 2015. The increase on the assets side is mostly attributed to an increase in the foreign exchange reserves. On the liabilities side, the most significant increase is derived from an increase in the balance of net monetary absorption tools totaling about NIS 17 billion, against the background of the need to absorb some of the surplus liquidity injected into the markets as a result of foreign exchange purchases, and an NIS 11 billion increase in the monetary base.
The Bank of Israel registered a loss of NIS 5.3 billion in 2016, about NIS 2.8 billion smaller than the loss in 2015. Similar to previous years, most of the loss was a result of exchange rate differentials on balances denominated in foreign currency, which totaled about NIS 7.1 billion this year, mainly due to the weakening of the euro and the pound. The Profit and Loss Statement includes income from foreign exchange reserves totaling about NIS 3 billion, which partly offset the loss resulting from the exchange rate differentials. The exchange rate differentials had a large and volatile impact on the Bank’s profit and loss due to the lack of currency balance on the Bank’s balance sheet.
According to the accounting principles customary at central banks, unrealized profits resulting from the revaluation of tradable securities to fair value and from exchange rate differentials on the foreign exchange reserves, as well as profits and losses from actuarial differentials, are attributed to the revaluation accounts and are only recorded on the Profit and Loss Statement once they are realized. In contrast, negative revaluations are attributed to the Profit and Loss Statement. The Profit and Loss Statement does not include losses from exchange rate differentials on the reserves denominated in foreign currency, mainly in respect of the dollar, totaling about NIS 3.4 billion, which were offset by profits accumulated in the revaluation account. In addition, the Profit and Loss Statement does not include unrealized profits totaling about NIS 2.7 billion derived from the revaluation of tradable securities, which were reflected in an increase in the revaluation account on the Balance Sheet. Most of the revaluation is a result of an increase in the value of the shares portfolio, which is not recognized as a profit in the financial statements, and is therefore not reflected in the Profit and Loss Statement.
The balance of the revaluation accounts, which reflects unrealized profits, was about NIS 25.6 billion in 2016, such that overall, looking at the deficit balance minus the revaluation accounts, the balance totaled only about NIS 35.9 billion, compared with a deficit of NIS 61.5 billion recorded in the balance sheet (see Figure).
The Bank of Israel fulfills the functions entrusted to it as the central bank, and acts to achieve the objectives set for it pursuant to the Bank of Israel Law: maintaining price stability and supporting growth, employment, reducing social gaps and the stability of the financial system. Its activity is not necessarily intended to generate profits. Some of the actions taken by the bank have significant ramifications on its financial statements, but alongside that, the achievement of the Bank’s objectives and fulfillment of its role have economy-wide advantages that are not reflected in the financial statements.