Financial Stability Report for the second half of 2017
During the second half of 2017, the domestic financial system continued to maintain stability. The factors contributing to its robustness include the continued improvement in the strength and stability of the banking system, the strength of economic activity in Israel, and the macroprudential measures taken by the Bank of Israel.
The process of improvement in the global economy encompasses many countries, and the financial markets abroad show stable development and a decline in volatility. The level of short-term risks originating abroad therefore declined relative to the level in the previous report. Economic activity in Israel is strong, and is expected to be supported by improvement in the global environment.
In the US, the interest rate path has been in an upward trend during the past year, while in Europe the quantitative easing adopted by the central bank was reduced, but interest rates in Israel and globally remain historically low. The low interest rate reduced the costs of financing for the public sector, households and businesses, and made it easier to service debt. However, the low interest rate and yield environment over time—in Israel and abroad—increases the risk appetite in seeking returns.
The main risks identified include: a reversal of the trend in real economic activity as a result of a shock to demand from abroad or as a result of geopolitical events; a sharp and rapid decline in housing prices; a sharp change in the global long-term interest rate curve; and a reversal of the trend in the global financial markets. In our estimation, the likelihood of these risks being realized in the short term is low or medium.
The housing market, household leverage, and the asset market are the main areas where we identify exposure to risk for the Israeli economy. The parameters examined in this report show that the intensity of the exposure to the housing and asset markets remained medium-high during the reviewed period, and that the intensity of exposure to consumer credit remained medium.
The developments in the overall assessment of risks and exposures to risk show that in the second half of 2017, the potential vulnerability of the economy remained unchanged at a medium level.
There are three boxes being published in the Financial Stability Report:
1. Developments in the activity of public companies providing nonbank credit
2. Overlapping credit portfolios and multiple lending in the Israeli banking system
3. Investment in housing and in the capital market: A comparison from an historical perspective