The Bank of Israel is deeply worried that the commercial banks are unable to value their mortgage backed securities (MBS), and calls them "a systemic weak point". Supervisor of Banks Rony Hizkiyahu has sent a draft circular to the banks, which stipulates regulations for valuing financial instruments. "Globes" has obtained a copy of the circular.
The Bank of Israel will require the banks, beginning with their full-year 2008 financial reports, which will be published in March 2009, to provide full disclosure on how they determine the values of their financial instruments, and to internally audit the calculations. The Banking Supervision Department and the Institute of Certified Public Accountants in Israel will discuss the circular.
The draft circular states that the Bank of Israel believes that "the banks totally rely on prices obtained from opposite parties or ratings companies [for valuing assets], without understanding the underlying assumptions for calculating the price and the inherent risk. This necessarily leads to cases in which securities are valued in the balance sheet and profit and loss statement at fair value, even without a process that enables a determination of the fair value with a reasonable degree of assurance."
In the circular, the Bank of Israel instructs the banks to sell "as soon as possible" their financial instruments that are difficult to value with a reasonable degree of assurance, and to the extent that "the scale of activity in these instruments at any point in time is immaterial".
The Bank of Israel also instructs the banks' boards to appoint a person with the proper skills to assess the fair value determined, and who will be independent of the bank officers who made the fair value determinations.
The circular covers MBSs, structured investment vehicles (SIVs), collateralized debt obligations (CDOs), and synthetic collateralized debt obligations (SCDOs), on which the banks have made huge write-offs this year.
Published by Globes [online], Israel business news - www.globes-online.com - on December 9, 2008
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