The Supervisor of Banks publishes a draft directive requiring the banks to increase their capital buffers against the housing credit portfolio

14/09/2014

Supervisor of Banks David Zaken published today a draft directive for consultation with the Advisory Committee on Banking Matters regarding capital allocations in respect of the housing credit portfolio. The directive sets out that, beyond the Common Equity Tier 1 capital ratio targets set by the Supervisor for the banking corporations (9 percent by 2015 and 10 percent by 2017 for the two largest banks), the banking corporations will be required to increase the Common Equity Tier 1 capital target by the equivalent of 1 percent of the outstanding housing credit portfolio. The applicability date for meeting the capital target set out in the directive is January 1, 2017, and the implementation will be gradual.

The draft directive is being published in view of the continued increase in housing credit and in its share of the total bank credit portfolio (Figure 1 and Figure 2). The aim of the directive is to increase the capital buffers allocated by the banking system against the housing credit portfolio, due to the increase in the risks inherent in this portfolio, thereby strengthening the banks’ ability to absorb unexpected losses, and strengthening financial stability in general.

In assessing the risk inherent in the housing credit portfolio, there is a concern that the continued expansion of housing credit increases the risks in this portfolio, mainly in view of the correlation between the risks inherent in the housing credit portfolio and the portfolio of credit to the construction and real estate industry, and the correlation between the housing credit portfolio and the portfolio of consumer credit extended to households. In this context, the average annual rate of growth of consumer credit (nonhousing credit granted to private individuals) has in recent years been about 7 percent (Figure 3 and Figure 4).

This measure is expected to increase capital requirements in the banking system by about NIS 2.7 billion, while the capital requirement is differential, varying from bank to bank in accordance with the volume of its housing credit portfolio, as below:

	Leumi	Discount	Hapoalim	Union Bank	Mizrahi-Tefahot	First International	Bank of Jerusalem
Estimated additional capital (in percentage points)	0.3	0.2	0.2	0.3	0.8	0.3	1.0
Estimate in NIS million	720	200	540	70	940	180	70

Supervisor of Banks David Zaken said, “Experience worldwide shows that crises in the banking system frequently develop as a result of the banks’ exposure to housing credit and to the real estate industry, mainly due to accelerated expansion of mortgage volumes. There is a concern that the assessment of risks inherent in the housing credit portfolio, particularly in view of its share in the bank credit portfolio, is lacking, inter alia due to the fact that during economic boom periods, the history of repayments by housing credit lenders is better than other types of credit.”

Figure 1

Outstanding residential loans, total of the banking system, August 2004 to July 2014