The Bank of Israel published a report today on the lessons of the global financial crisis in 2007-2009. The report was edited by Governor of the Bank of Israel Stanley Fischer, former Deputy Governor Zvi Eckstein, and current Deputy Governor Carnit Flug, and compiled by researchers Kobi Broida, Zvia.Ardman, and Merav Shemesh.
"In retrospect, the financial system in Israel weathered the storm, Israel’s financial institutions, including the banks, showed resilience relative to the intensity of the crisis, their stability was maintained, and none collapsed. However, there were real fears at the time concerning the stability of some financial institutions and the continued proper functioning of the financial system," the report states. In the central bank's view, "The main effect of the crisis was in the non-bank credit market, which was essentially paralyzed and became the focus of risk for Israel's financial system during the crisis."
On the role of the Supervisor of Banks, the report says, " During the crisis, the Banking Supervision Department focused on strengthening capital adequacy in the banking system and improving the banking system's risk management, in line with long-term processes that it was involved in prior to the crisis. It also concentrated on closely monitoring the exposure of the banks to developments in Israel and abroad, particularly exposure to foreign assets and large borrowers in Israel, on increasing transparency with regard to their exposure, and on intervening when necessary." The Supervisor of Banks at the time was Rony Hizkiyahu.
Among the lessons of the crisis, the report mentions the need for prevention, and highlights the risks stemming from non-bank sources of finance: "Emphasis is being placed on the need for macroprudential policy for maintaining financial stability and reducing the risk of a crisis. Such a policy should be based on an integrative view of the financial system and the interrelationships among its various components.
"In addition, the importance of a high level of capital adequacy is being emphasized alongside the need to improve risk management in all financial institutions and the regulation of those institutions. In particular, there is increasing awareness of the importance of supervision of non-bank entities, instruments and markets."
Against this background, the recent announcement by the Bank of Israel of its intention to raise the banks' core capital adequacy ratio from 7.5% to 11%, as an important preventative measure to reduce the banks' vulnerability to a further crisis, is understandable. "The Bank of Israel is telling us to wear a belt with braces on top," one bank CEO said this morning.
Other lessons relate to policy measures required at times of crisis: "The emphasis here is on the need for quick and determined action in order to stabilize systemically important financial institutions, including non-bank entities, and to inject liquidity into the financial system and relevant institutions. This is in addition to the need for a quick and large-scale response by monetary policy, which includes quantitative tools," the report states.
The report also reviews measures taken successfully in 2008-2009: "Monetary policy played a central role, involving unprecedented monetary expansion during the crisis and the use of unconventional tools for quantitative easing. These included the purchase of government bonds, in addition to the purchase of foreign currencywhich had begun earlier in order to increase foreign exchange reserves and in view of the appreciation of the shekel… The statements by policy makers of their confidence in the resilience of the financial system and their willingness to take additional steps if needed helped to calm the markets. "
Fiscal policy played a smaller role, according to the report: "The response of fiscal policy was more restrained, due to the lack of an approved budget, among other things; however, fiscal policy did allow automatic stabilizers, to operate through decreased tax revenues, and also focused on the provision of guarantees."
Published by Globes [online], Israel business news - www.globes-online.com - on October 5, 2011
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