Over the weekend, the Bank of Israel addressed an unusual letter to bank managers. The letter, which was sent to CEOs on the last day of 2021 by Deputy Supervisor of Banks Or Sofer, opens with the headline “Increase in credit risk in the construction and real estate industry.” The Supervisor of Banks, Yair Avidan, is concerned about the volume of mortgage financing, which this year exceeded NIS 100 billion.
The letter, which is not yet a binding provision, states that “there has been a significant increase in commercial credit balances and in the construction and real estate industry, partly due to increased risk appetite, easing of underwriting conditions and a decrease in credit spreads in new transactions. As a result, there has been an increase in the level of risk in the commercial credit portfolio, which is reflected in an increase in the degree of concentration of the portfolio and an increase in the degree of exposure. “
The Supervisor refers to a letter sent on August 19, 2021, which includes the need to adjust in the financial statements for 2021 onwards the group provision for the commercial credit portfolio, in a manner that will reflect an increase in the level of risk. In other words: the Bank of Israel demands an increase in the provision for problem debts and credit losses in a way that will embody the new level of risk. “The aim is to ensure that the provisions for credit losses in the commercial portfolio are sufficient to conservatively and carefully cover the current estimate of credit losses,” the Banking Supervision Authority wrote.
In addition, the directors of the banks are required to ensure that the reports for 2021 onwards are included in the report of the Board of Directors and management, including proper disclosure of the increasing risk in the construction and real estate industry and its effect on risk in the commercial portfolio. . Also, quantitatively describe the risk characteristics, types of exposures, the purpose of the real estate, the quality and value of the collateral.
This letter contradicts the position of the bank managers, who are actually asking the Bank of Israel to make the credit terms more flexible in order to meet the financing requirements of the construction sector.
Bank Hapoalim CEO Dov Kotler, for example, said last week: “As is well known, the banking system is subject to regulatory restrictions on real estate financing. We are constantly working on creative solutions that will allow credit to continue to be provided to the real estate industry. We are heading towards a record year of construction starts, and at the national level it would be wrong for the sources of funding to be the barrier that will delay this. “
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