Three weeks ago, the IDF Home Front Command carried out its annual exercise, "Turning Point 6", to test readiness for a strong earthquake followed by a tsunami. The exercise encompassing the financial system, including the banks and the Bank of Israel. Sources have told ''Globes'' about several key details of the scenario, including large provisions for credit losses and a jump in the shekel-dollar exchange rate to NIS 5/$.
Although the exercises simulated an earthquake, it can be assumed to be equally relevant for other extreme scenarios, such as a war. It is important to note that a worst-case scenario is not an event like Operation Pillar of Cloud, and that the economic consequences of a disaster cannot be accurately estimated, and that these are only theoretical simulations.
In a worst-case scenario, there is first of all the physical damage to enterprises and infrastructures, such as roads and bridges. The destruction will make it difficult for enterprises to meet debt payments, and the banks estimate that their provision for credit losses could exceed NIS 10 billion.
The banks would also take a hit from the bond market. A worse-case scenario assumes a sharp jump in yields on government bonds, which will result in capital losses for investors. Israeli banks are very exposed to Israeli government bonds. Last week, the Bank of Israel reported that the banks' securities portfolio rose by 15% during the first half of 2012 to NIS 168 billion. Most of the increase was due to the banks' sharply greater exposure to government bonds.
The worst-case scenario also involves flight of capital by foreign investors and by Israelis seeking to convert shekels into foreign currencies. Under this scenario, the shekel-dollar exchange rate rises to NIS 4.70-5/$. The scenario suggests that such a jump in the exchange rate would cause the banks foreign currency liquidity problems, and that the Bank of Israel would have to intervene.
The Bank of Israel has tens of billions of dollars in foreign currency reserves, which it could make available to the banks and insurance companies. However, the Bank of Israel would only do this as a last resort to head off a threat to the stability of the financial system.
The Tel Aviv Stock Exchange (TASE) does not intend to shut down in the event of a worst-case event. If it cannot operate in Tel Aviv, it has a back-up system in Netanya in a new and air-conditioned facility which was inaugurated 30 months ago, replacing the previous back-up facility in Ra'anana.
For the TASE, maintaining continuous operations is paramount for keeping its image and investor confidence intact. So long as there is no curfew keeping people at home, the TASE intends to continue business as usual even during an emergency.
Published by Globes [online], Israel business news - www.globes-online.com - on November 18, 2012
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