• The positive trend in the financial markets and the stability of the financial system persisted in 2007. The global financial crisis that plagued the financial system in the developed countries during the second half of the year had only a moderate impact on Israel by the end of 2007. The direct effects of the crisis have been increased volatility and risk margins in the financial markets, and an end to the upturn in asset prices that was typical of recent years.  
  • The financial system's resilience––its ability to absorb shocks––increased in 2007. This improvement was reflected in a decline of banks’ credit risks, while their capital adequacy, and that of insurance companies, was maintained. The improvement was also reflected by the continued rise in liquidity in the financial markets, and by the greater diversification of credit risks in the economy. However, it appears that the financial institutions failed to exploit their high profitability in order to increase their capital ratios. 
  • The structural reforms that were applied in recent years have helped to enhance the financial system: the banks’ share of business-sector finance decreased further in 2007, the corporate bond and ETF (exchange traded funds) markets expanded, the competition for the management of the public's savings increased, and the banks began to develop a pension advice network. 
  • Looking ahead, the risk of shocks in the financial system has increased due to the possibility of a slower rate of growth and a further expansion in risk margins as a result of the spread of the global crisis. The risk to the system also increased as a result of the rapid expansion in credit from institutional investors, which have less experience in monitoring credit risks and that are still subject to a lower level of supervision than the banks.
    The measures initiated by the supervisory authorities regarding the management of risks and capital adequacy are helping to reduce the vulnerability of the financial system. In view of the prevailing risks however, greater enforcement and control are still necessary with respect to risk management and the actual positions taken at the financial institutions, principally the insurance companies. The supervisory authorities also need to cooperate in making the appropriate preparations for dealing with financial crises.  

The Financial System - Full File