Financial Markets
In general, the global crisis is expected to significantly moderate the rate of price increases during the coming year or two. The moderating effect on price indices in the near future will be relatively weak but will strengthen over time.
The main factors expected to moderate inflation are the decline in global energy and food prices, which has already occurred to a large extent, and the expected drop in domestic demand. The drop in global energy and food prices is acting to moderate the increase in the cost of production and thus reinforces the moderation of price increases. The drop in the value of the public's financial assets (the prices of shares and bonds and at a later stage perhaps the price of housing) is acting to reduce the demand for private consumption and a decrease is expected in the demand for exports and perhaps investment.
An additional factor that is expected to moderate demand (primarily investment by firms) is the fear of bankruptcy which is manifested in, among other things, the difficulty encountered by some firms in obtaining credit. This could lead to a reduction in investment and production, a decline in the demand for labor leading to an increase in unemployment and a lower rate of increase in wages, which in turn will also affect the demand for consumption
From a system-wide perspective, the banks are currently enjoying greater stability and are more able to absorb shocks than in any previous period. Furthermore, the banks in Israel are being managed with greater caution and are expanding their liquidity reserves. The damage to the banking system in Israel so far has not been significant from this perspective.
The Bank of Israel is working continuously to strengthen the stability of the banking system. Apart from the ongoing and routine activities that are meant to strengthen the banks' systems of control, management and auditing, the Bank of Israel has endeavored to increase the banks' capital base significantly during the past two years, with the goal of creating a cushion against unexpected losses and events such as financial crises.
With respect to the current global crisis, the Bank of Israel is assessing the situation of each bank on an ongoing basis, as well as that of the banking system as a whole, using a data and information which the banks are required to provide on an expanded scale. The Bank of Israel instructs the banks as to the measures required of them, both regarding the system as a whole and specific banks, and closely monitors the banks' activities and preparedness. In addition, the Bank of Israel maintains ongoing contact with the Ministry of Finance and the Israel Securities Authority in order to obtain an overall picture of the situation, ensure coordination and decide on policies and measures to be implemented in the future.
The Bank is assessing a wide variety of scenarios, ranging from the most pessimistic to the most optimistic, and future plans of action have been decided on in order to ensure that the financial system will continue to function and that depositors will not be hurt.
There is no concern for the stability of any banking institutions in Israel.
Globalization plays a critical role in the correlation between the behavior of capital markets in Israel and that of markets abroad. As a result, a high level of volatility in global markets leads to the same in Israel. For example, when large international financial institutions experience liquidity shortages, they are forced to sell assets of all types and in all locations. In addition, the crisis also tends to reduce global growth, which also affects Israel, primarily through its exports.
The main factor that initiated the crisis was the accumulation of mortgages in default in the US as a result of the reversal of the trend of US housing prices. This occurred against the background of easy mortgages over a period of several years during which mortgages were provided to homebuyers who did not have sufficient ability to repay them. The losses spread to large financial institutions in a number of countries through the globalized financial markets, which facilitated the creation and marketing of complex financial instruments world wide.
These instruments had a variety of terms to deal with default that had not been in use in the past and some of the instruments were sold and guaranteed by large financial institutions. Large investment houses worldwide held the view that advances in the study of finance had enabled a better understanding of these products and the correct valuation of the products and their guarantees. In retrospect, the risk assessment of these products was extremely deficient. Thus, significant losses were incurred by these large financial institutions and their customers. As a result, uncertainty regarding the financial stability of these institutions spread at a surprisingly quick rate and activity in the markets for more basic financial products-in which these same investment houses are active-was also affected.
Globalization plays a critical role in the correlation between the behavior of capital markets in Israel and that of markets abroad. As a result, a high level of volatility in global markets leads to the same in Israel. For example, when large international financial institutions experience liquidity shortages, they are forced to sell assets of all types and in all locations. In addition, the crisis also tends to reduce global growth, which also affects Israel, primarily through its exports.
in Israel and that of markets abroad. As a result, a high level of volatility in global markets leads to the same in Israel. For example, when large international financial institutions experience liquidity shortages, they are forced to sell assets of all types and in all locations. In addition, the crisis also tends to reduce global growth, which also affects Israel, primarily through its exports.
Coordinated programs have a good chance of providing immediate solutions to that part of the crisis which involves a lack of confidence and a lack of liquidity in the financial system. The higher the level of confidence among the public and the lower their tendency to panic (which leads to herd behavior), the higher the chances of success.