• The global financial crisis worsened in 2008 and threatened to paralyze the world’s financial system. As a result of the crisis, a serious liquidity shortage developed in the global financial system, including at the very core of the interbank money market. Many banks and financial institutions worldwide collapsed or encountered serious difficulties, and an unprecedented level of government injection was required in order to save them. The financial crisis encroached heavily on real activity as well, and by the second half of the year nearly all of the world’s countries were suffering from a considerable downturn in activity and part of them had entered a recession. 
  • The financial markets in Israel were hit by the crisis as badly as other financial markets worldwide, and their reaction reflected concern over the implications of the crisis for real activity in Israel: Prices of shares and corporate bonds fell heavily, the volatility in the markets increased greatly and the yield margins in the credit market rose sharply, thereby increasing the cost of raising credit in the economy. In addition, the exchange rate of the shekel appreciated sharply until June, followed by a large depreciation later in the year. 
  • The profitability of the banks and the insurance companies in Israel was also badly hit in comparison with previous years, although despite the deterioration in their position, the financial institutions in Israel remained resilient compared with those abroad. This was due to their favorable situation prior to the crisis, and because the banking system in Israel is conservative and operates under comprehensive regulation and close supervision. Also alleviating the adverse impact on Israeli compared with foreign institutions were their limited exposure to toxic assets worldwide and their low reliance on the local and international capital markets for raising sources. 
  • The domestic corporate bond market was the center of risk for the local financial system due to its rapid and unbalanced development during recent years, which was reflected by the increasing amount of capital raised for financing investments in real estate abroad—an industry that was initially at the center of the financial crisis. 
  • Growing uncertainty and savers’ desire to move to lower risk channels of savings led to increased withdrawals from mutual funds specializing in bonds and from the provident funds. These funds were compelled to realize large volumes of assets, which spurred the rise in yields in the corporate bond market.  
  • Due to the seriousness of the crisis, the Israeli government and the Bank of Israel adopted a number of measures that were aimed at expanding the availability of credit in the economy and reducing its cost, and at encouraging real activity. The measures adopted included: the granting of guarantees to local banks for raising capital, the establishment of Manof (leverage) funds, large cuts in the interest rate, and intervention in the foreign currency market and the government bond market.

The Financial System - Full File