Sources inform ''Globes'' that the Bank of Israel will raise the banks' core Tier-1 capital adequacy ratio target to 11% by 2016, as part of the implementation of the Basel III standard on bank capital adequacy and liquidity. The new means that the banks will have to boost their core capital by NIS 27 billion, 80% of their average aggregate annual profit over the past five years.
The core Tier-1 capital adequacy ratio is currently 7.5%, and the banks' average ratio is 8%. It is estimated that Bank Hapoalim (TASE: POLI) will have to increase its core capital by NIS 9 billion to reach the new target, Bank Leumi (TASE: LUMI) will have to increase its core capital by NIS 8 billion, Israel Discount Bank (TASE: DSCT) by NIS 5 billion, Mizrahi Tefahot Bank (TASE:MZTF) by NIS 3 billion, and First International Bank of Israel (TASE: FTIN) by NIS 2 billion.
A well-informed source said, "The intention is clear: the banks will have to begin preparing now."
The Bank of Israel's decision has a far-reaching impact on the banks. The higher capital adequacy target will prevent them from distributing dividends, reduce their return on equity, lower their profits, reduce their lending capacity, and will cut executive and employee bonuses. The CEO of one large bank said, "The meaning of the regulator's directive is clear: we'll lend the Israeli economy less money."
Greater capital means that Israel's banks will comply with the strict international core capital standard. But whereas banks in other countries have until 2019 to achieve compliance, the Bank of Israel believes that market pressures will bring the timetable forward to 2016 - the target it has set.
The source believes that the banks will have to use every means available to navigate between the cessation in dividends, streamlining, and the freeing up of resources for activities that are not capital intensive. He added, "It is very probable that the banks will have to raise more capital, either through rights issues or share offerings."
Supervisor of Banks David Zaken is expected to present the final targets and milestones to the banks by March 2012. The Bank of Israel originally planned to publish the directive by the end of 2011, but because the targets are higher and the timetable is longer than originally foreseen, it believes that there is no point in publishing two targets. It therefore expects that, as part of the Internal Capital Adequacy Assessment Process (ICAAP), each bank will present a three-year plan to achieve the target.
The 11% capital adequacy ratio is set in Basel II - The New Basel Capital Accord of the Basel Committee on Banking Supervision, but the Basel III methodology reduces the ratio to 10% because of its different definitions of capital. The same thing happened when the banks switched from Basel I to Basel II in 2009.
Under the Basel III standard, each country's banking regulator will determine its Systemically Important Financial Institutions (SIFIs) - banks which must not fail because that would damage the entire economy. These banks therefore face tighter capital adequacy ratios than other banks. All of Israel's five big banks are SIFIs. If Bank Hapoalim and Bank Leumi were US banks, they would be among the country's top 35 banks and would also be SIFIs there. Given Bank Hapoalim and Bank Leumi's huge size relative to the Israeli economy, they might fall under an even stricter category or tighter deadline.
Published by Globes [online], Israel business news - www.globes-online.com - on October 3, 2011
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