13.12.2009
 
The Supervisor of Banks: Risk management in the nonbank credit market needs to be strengthened
 
The Supervisor of Banks, Rony Hizkiyahu, addressed the "Globes" Business Conference today in Tel Aviv
To ensure that the nonbank credit market functions properly also in a crisis, risk management in the nonbank system must be strengthened, with stricter regulation and supervision. So said the Supervisor of Banks, Mr. Rony Hizkiyahu, at the "Globes" Business Conference held today in Tel Aviv, in his review of the challenges facing Israel's credit market in light of the latest economic crisis. He stated that decisions on credit in both the banking system and nonbank system must be based on an analysis of risks and an understanding of the environment in which the activity takes place. Risk pricing must be based on risk analysis that takes into account the implications for credit risk of possible changes in the business environment. Special attention must be paid to creating mechanisms to ensure a balance between the responsibility to manage the public's assets on the one hand, and losses incurred in cases of mismanagement on the other. This would serve as an additional means for boosting public confidence in the system.
The Supervisor started with a description of the main features of the banking system that contributed to the stability of the financial system in Israel, unlike the developments in other financial systems around the world. He noted the importance of strict supervision, and conservative activity and the maintenance of risk management standards by the banking system. The Supervisor also discussed the characteristics of the capital market, including the fact that it has many active participants, a wide range of issuers, and a dramatic increase in the amount of credit extended to the business sector, unaccompanied by appropriate means of control.
The Supervisor referred to the situation in the capital market prior to the outbreak of the crisis, including the features that resulted in capital market failures. He spoke of two main problems: (1) underpricing of nonbank credit risks, and (2) structural problems resulting from the rapid switch of the public's assets to the nonbank system without the advancing of appropriate regulation.
"In the latest economic crisis the economy experienced a sharp decline in the availability of nonbank credit, in contrast to the trend in the last few years when most of the credit requirements of the business sector was provided from outside the banking system, "said the Supervisor. "In this period, infrastructures for proper debt arrangements in the economy were conspicuous by their absence, leading to increased volatility in the markets, which in turn reflected investors' uncertainty."
Mr Hizkiyahu concluded by stressing the importance of maintaining the ability of the nonbank sector, alongside the banking sector, to supply the range of the business sector's credit needs, with strict attention to appropriate supervision on its various activities and prudent and responsible risk management.