A recession like the one in 2002 will cause severe problems to the mortgage market and cost the banks heavy credit losses as 23,000 families will struggle to meet their monthly payments, according to the Bank of Israel's extremely bad scenario that Supervisor of Banks David Zaken described to the real estate conference in Tel Aviv today.
"During the past year, the Bank of Israel drew up an extremely bad macroeconomic scenario of a severe recession. This scenario was made for a short horizon of just two years, reflecting one of many possible scenarios, and it is not the worst-case scenario, but similar in its severity to scenarios made by regulators in other countries," said Zaken. "The scenario is mainly based on the 2002 recession, and includes a drop in GDP, a higher interest rate and drop in home prices. The scenario's operating goal was to understand the risk foci of each bank and of the banking system in general, with an emphasis on the consequences for the housing credit portfolio and the exposure to the construction and real estate industry and leveraged credit."
The scenario's basic assumptions are a reduction in GDP, a sharp rise in the interest rate, a 20% drop in home prices, and a 12% unemployment rate. "The recession, interest rate, and unemployment are the ones that prevailed in 2002, and caused repayment problems for 23,000 borrowers, which is a very high number. We're talking about 23,000 families, 23,000 homes given as security to the banks, 23,000 debt settlements at the banks' doors, and most of all, at the door of Israeli society as a whole because of the social consequences. That is why we are afraid. For the sake of comparison, today, the banking system reaches debt settlements without the need for evictions, and the number of evictions does not exceed a few hundred homes a year. We're talking about an entirely other order of magnitude."
Commenting on the Bank of Israel's macro-prudential measures, Zaken said, "The measures we took were not intended to completely halt the granting of mortgages, but to reduce the latent risk in each mortgage and in the mortgage portfolio as a whole. They were intended to protect borrowers and the stability of the banking system."
Zaken admitted, "These measures, while reducing the risk, have failed to rein in the rate of mortgages, which reached a record NIS 4.5 billion in March." He reiterated his warning, "If repayment difficulties arise because of a deteriorating macroeconomic climate, this will increase the damage to the banks, because of the consequences on all borrower companies. It should be remembered that damaging the banks' soundness affects the entire economy, and this must not be minimized. A strong banking system can support the business sector to allow it to survive crises and return the economy to growth. The objective isn't just to identify the risks and quantify the possible consequences, but to be proactive to reduce the negative effects if the risks materialize. That is what we've done and are doing."
Published by Globes [online], Israel business news - www.globes-online.com - on April 8, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014