- An analysis of the environment in which the domestic financial system operates and its level of robustness shows that it remains stable. This has improved over the years, supported by the economic environment and the positive business cycle enjoyed by the Israeli economy.
- While the Israeli economy has enjoyed a good macroeconomic state, as well as the ability to withstand shocks, assessments[1] are that there is greater likelihood of an economic or geopolitical shock originating abroad that could have a negative impact on real and financial activity in Israel.
- In the first half of the year, the long period of almost constant price increases in the financial markets came to an end. There were sharp declines globally, with Israel following, and increased volatility during the first part of the period, but the trend changed later on.
- The increasing spreads of corporate bonds somewhat mitigated the economy’s exposure through the asset price channel, but the increasing volatility and the tendency toward price declines on foreign markets—inter alia against the background of the monetary tightening adopted by central banks—as well as the marked declines of spreads in recent years, increase the likelihood1 that the recent increased yields are the beginning of change in trend in the global financial markets, which may worsen and have an impact on the domestic capital markets.
- The Israeli economy’s most conspicuous vulnerability is the housing market, in view of developments in this market in recent years.
- The slowdown in the housing market has a marked impact on public companies in the residential construction industry, and led to a decline in the volume of sales and to an increase in the stock of unsold homes. Stress tests that were examined for variables such as home prices, sales and interest rates show that the effect on the financial leverage and immediate liquidity of the companies is significant only at the extreme values, while the effect is relatively slight at the lower values.
- An examination of the financial state of households as an aggregate shows that it has not changed significantly from the previous half-year. Most of the nonhousing credit, which stands at 15 percent of GDP, is issued by the banks, but there is increasing activity on the part of other entities (credit card companies and nonbank entities) that provide credit.
- The increasing availability of nonbank credit increases the financial risk of households that take out such credit, mainly those in the lower deciles. Since these households account for a relatively small share of overall debt, this does not constitute a risk to the financial system, although there is a risk to the households themselves. It should also be remembered that the pricing of credit by lenders is based on partial information (until the Central Credit Register becomes operational).
- Looking long-term, the strength of most industries in the business sector has improved. This is reflected in the improved financial ratios and in other indicators of the public companies.
- The improvement in the banking system’s resilience continues, and was reflected in 2017 in the continued accumulation of capital and in its composition, in the continued high quality of the credit portfolio, and in liquidity coverage ratios that are higher than required.
- All of the insurance companies met the capital adequacy requirements set out in the Solvency II transition directives, but not all of them are meeting other targets.
There are two boxes being published in the Financial Stability Report:
1. The financial strength of the Israeli economy vis-à-vis abroad.
2. An analysis of the financial stability of public companies in the residential construction and development industry.
* The publication of the English version Financial Stability Report for the first half of 2018, and of the boxes included therein, is forthcoming.
[1] Based mainly on the assessments of international institutions.