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 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.

 

  • The Bank of Israel’s financial statements for 2017 were affected by monetary policy, the foreign exchange reserves investment policy, and a number of trends in the global economy.  The global economy was characterized by accelerated growth.  Prices on the equity markets increased sharply, and monetary policy remained accommodative with low interest rates, which were even negative in some economies. In contrast, the gradual normalization process in the monetary policy of the Federal Reserve continued, with the interest rate being increased three times during the year.
  • The Bank of Israel’s balance sheet grew by about NIS 7 billion (2 percent) to about NIS 401 billion at the end of the year.  The increase on the assets side is mostly attributed to an increase in the foreign exchange reserves, which was mainly a result of profits, asset revaluation, and foreign exchange purchases made by the Bank of Israel.  These were partially offset by negative exchange rate differentials on the shekel value of the reserves, mainly a result of the shekel’s appreciation vis-à-vis the dollar.
  • Due to the currency imbalance[1] that typifies the Bank’s balance sheet, and due to the fact that the financial statements are presented in shekels, changes in the shekel’s exchange rate against the currencies in which the foreign exchange reserves are denominated on the balance sheet have an effect that is reflected in large fluctuations in the shekel value of the reserves. The Bank does not act to hedge the effect of these changes, and does not act to increase yields in shekel terms, but rather in terms of the numeraire[2] subject to the guidelines laid out by the Monetary Committee.  In addition, in recent years the Bank has gradually increased the proportion of the foreign exchange reserves invested in shares, which has had a significant impact on the returns of the reserves portfolio.  However, the profits from the increase in share values are not included in the Bank’s Profit and Loss statement as long as they are not realized, and are attributed to the revaluation accounts.
  • In 2017, the Bank recorded a profit from financial operations of about NIS 140 million.  The financial profit was the result of increased income from the foreign exchange reserves and reduced expenses on exchange rate differentials.
  • In recent years, profits on the foreign exchange reserves exceeded expenses in respect of monetary tools.  This trend continued in 2017, mainly due to the narrowing of the interest rate gaps between Israel and the economies in which the reserves are invested, and due to an increase in profits from the shares component as a result of increases recorded in the markets and an increase in their weight in the foreign exchange reserves.
  • The annual loss was mainly a result of losses from negative exchange rate differentials due to the weakening of the dollar against the shekel. However, most of the negative exchange rate differentials were offset by the revaluation accounts (which were built up due to the weakening of the shekel in previous years), and were not reflected in the Profit and Loss statement.  This is in accordance with the accounting rules customary at the Bank of Israel and accepted at central banks around the world.

 

The Bank of Israel’s balance sheet for 2017 totaled about NIS 401 billion, an increase of about NIS 7 billion (2 percent) relative to 2016.  The increase on the asset side is mostly attributed to an increase in the foreign exchange reserves.

 

On the liabilities side, the most significant increase is derived from (1) an increase of about NIS 12 billion in the monetary base, comprised of currency in circulation and shekel current deposits with the banking corporations’ and (2) an increase on the balance of net monetary absorption tools—makam and term deposits—totaling about NIS 9 billion.  Some of the absorption is derived from the need to absorb surplus liquidity that exceeded demand for the monetary base, in order to avoid pressure to lower the interest rate to below the level set by the Monetary Committee.

 

The Bank of Israel registered a loss of NIS 788 million in 2017, compared with a loss of about NIS 5.3 billion in 2016.  However, in 2017, the Bank recorded a profit from financial activity (compared with a loss in the previous year), mainly a result of income from the exchange rate reserves (about NIS 6 billion, excluding unrealized profits), which more than offset the loss in exchange rate differentials on the reserves denominated in foreign currency (about NIS 5.6 billion beyond the decline in the revaluation accounts, mostly due to the weakening of the dollar).  The exchange rate differentials had a large and volatile impact on the Bank’s Profit and Loss due to the currency imbalance 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 unrealized profits resulting 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 totaled about NIS 4.7 billion, but is not recognized as a profit in the financial statements, and is therefore not reflected in the Profit and Loss Statement.  In addition, 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 19.5 billion, which were offset by profits accumulated in the revaluation account.  The Profit and Loss Statement also does not include unrealized profits totaling about NIS 3.2 billion derived from positive exchange rate differentials, mainly in respect of the euro, which increased the revaluation account on the balance sheet.

 

The balance of the revaluation accounts, which reflects unrealized profits, was about NIS 13.5 billion at the end of 2017, such that the deficit balance minus the revaluation accounts totaled only about NIS 48.8 billion, compared with a deficit of NIS 62.2 billion recorded on the balance sheet.


[1] While the vast majority of the assets on the balance sheet are denominated in foreign currency, liabilities are mostly denominated in shekels.

[2] See the report on investment of the foreign currency reserves for 2017 for details.  In that report, the return on holding the reserves portfolio is measured in terms of the basket of currencies—the numeraire.  The numeraire is a component that includes three currencies—the dollar, the euro, and the pound sterling—which reflects the potential uses of the reserves.