The Bank of Israel today published the results of the stress tests conducted by the IMF last November on Israel's banking system. The tests found that Israel's banks are stable and in good shape to withstand shocks.
The IMF said that while the banks' level of risk, if the scenarios materialize, would be higher than the levels seen in the 2008 crisis, the risk of Israeli banks is lower compared with other countries.
The stress tests found that in each of the scenarios, the core capital adequacy ratios of Israel's five big banks - Bank Hapoalim (TASE: POLI), Bank Leumi (TASE: LUMI), Israel Discount Bank (TASE: DSCT), Mizrahi Tefahot Bank (TASE:MZTF), and First International Bank of Israel (TASE: FTIN) - was above the mandated minimum. However, there were losses at some banks, and core capital adequacy ratio at one bank - the IMF did not say which - fell to 6.9%.
Sensitivity to risk factors tests found that the greatest effect on capital was due to the concentration of borrowers in the credit portfolio, which the IMF said carried significant risk. The banks' aggregate core capital was NIS 74 billion at the end of 2011. The stress tests found that in the event of the collapse of the largest borrower group, the banks would lose 8.5-12.6% of their core capital - i.e. losses of NIS 6-9 billion.
If the three largest borrower groups were to fail, the damage at each bank would be 4.3-6.6% of their core capital, or NIS 3-5 billion each. The IMF said that for some banks, the effect of such a simultaneous collapse of the three largest borrower groups would be substantial.
Another weak point is the banks foreign currency liquidity. The liquidity sensitivity tests found sufficient liquidity, but also noted weakness in the banks' foreign currency liquidity. At some banks, the amount of liquid foreign currency assets was insufficient to meet the fair liquidity ratio in the stress scenarios. However, a 15% devaluation would affect the banks' core capital by 3.1%, a loss of NIS 2.3 billion.
The scenario of a 25% drop in the capital market found little effect on the banks, with a loss of up to NIS 3 billion, or 3.8% of their aggregate core capital. Insolvency by European countries (Italy, Spain, Greece, Portugal, Ireland, and, for the first time, Belgium) would cost Israeli banks up to NIS 1.1 billion.
Local and global recessions
The IMF assumes a local recession by 2014, due to geopolitical instability and no GDP growth. Under this scenario, GDP will shrink by 2.8% in 2012, and growth will be 1.2% in 2013 and 2.5% in 2014. It also assumes higher unemployment and a global recession caused by difficulties in European countries and the Eurozone.
The IMF says that contributing factors to the banks' ability to withstand the extreme scenarios include their fairly good capital levels and profits, their low provisions for credit losses, including housing credit, and negligible exposure to sovereign debt of crisis-ridden European countries.
Published by Globes [online], Israel business news - www.globes-online.com - on April 16, 2012
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