2023-08-05 21:31:21
In an article published in Bizportal about two weeks ago, which did not arouse much public interest, Sarah Kendler, head of the corporate department at the Securities Authority, was quoted as strongly criticizing non-bank credit companies.
According to her, within a year (December 2021 compared to December 2022) an aggregate increase of approximately 32% was recorded in the credit portfolios of companies operating in the field of check discounting, the main branch in the field of credit among listed companies. “The expense for credit losses increased 3.5 times during that period!”, Kendler exclaimed, “Based on these two figures alone, one could think that the increase in risk in light of the interest rate had already been taken into account in the companies’ calculations. However, the coverage ratio of the provision in relation to problematic debts reflects a different picture “.
Kendler stated that the Authority actually supervises 20 companies out of 700 companies that received a license to operate in the non-banking market, and even those few companies worry her.
Arguably, these alarming signs should not alarm the public. Some of them have increased, but the non-banking companies still hold less than 10% of the credit market. But measures promoted by the Bank of Israel today can change the situation.
The evolution of household debt, broken down by lenders, without mortgages (source: Bank of Israel)
The law that will increase the risk
The securitization law, which was presented for public comments and is expected to reach the Knesset soon, seeks to securitize the public’s debts, including mortgages, and sell them on. The governor promises that the securitization law will “spread risks, open up the non-banking market, and lower financing costs” but who will supervise that “developed non-banking market”?
The non-bank credit companies are not supervised by the Bank of Israel, but only by the Securities Authority and the Capital Market Authority. This supervision does not include aspects of risk management for financial stability, and this is as part of the agreements established by the Strom Committee, with the aim of creating competition in the financial sector.
We all remember what an unregulated debt securitization market can do. The process of mortgage and debt securitization was at the heart of the subprime crisis, when bad mortgages were mixed with good ones in a bond that was given a false credit rating by the rating companies. These bonds were sold to everyone and prices soared until the Great Crash.
The governor promises that this time it is different, but it seems that the Securities Authority has concerns that the governor does not share. A senior official at the Securities Authority was quoted in Calcalist as explaining the necessity of a double rating given by two rating agencies. “Currently, the authority operates without a chairman, and therefore a situation must be prevented in which pressures will now begin to be applied again to help the banks clean assets from their books and transfer them to the public,” said the same senior official. A real revelation […] The Authority’s requirement for a double rating is a minimum requirement […] The conflicts of interest of the rating companies are clear.”
But in spite of this, the double rating that that senior sees as a minimum requirement, does not exist in the proposed law as a mandatory requirement. In recent years, more non-banking companies have collapsed, including Unit Credit, Backing Holdings, Bull Commerce, and more. Again and again the Securities Authority and the Capital Market Authority miss the failures.
In the case of a “backup”, the Securities and Exchange Authority summoned the controlling owners of the company only in September 2022, three months after the company collapsed, and ignored many warning signs. The Capital Markets Authority issued a circular with information requirements from the non-bank credit institutions, five months after the collapse of the backup. Obligation The report did go into effect last July, but the public does not have access to the information.
In the stability report for 2022, the Bank of Israel states that the mortgages of the non-bank entities are more risky and fall into arrears more often, but there is no systemic danger to financial stability, but only a localized danger to the households that will be harmed. will collapse as a result of the risk, to remember that for many of those complementary loans, the bank that lends the mortgage has no information at all, and the entities that lend them are not supervised by the Bank of Israel, because as mentioned, they are non-banking entities.
Postponement of payment difficulties to a later stage
And yet the rate of bad credit and delinquent credit in the banking system remains low. In Israel, God forbid, we do not see families being evicted from their homes in large numbers. What we do see is a meteoric increase in loans against training and provident funds and the withdrawal of funds from them, the withdrawal of executive insurance and even pension funds, an increase in the use of reverse mortgages, when the loan given is given in a lump sum rather than an annuity, and is used to supplement equity or face a loan.
That is, households may be able to postpone the day when they face payment difficulties by raising whatever lump sum they can get their hands on, but the risk does not disappear.
In addition, there is an increase in the turnover of mortgages, when in most cases it is a spread over many years, a spread that perhaps reduces the pressure on the monthly payment, but increases the total amount so that the return to shekel ratio reaches up to 2:1, and in addition, a long mortgage increases the exposure to changes in interest rates and indexes over time .
until the next crash
These days, the Bank of Israel is making a move to digitize the mortgage cycles, and the non-banking entities are also invited to this celebration. According to the new instructions, the lending bank may not refuse to work with non-banking companies and is obligated to send them the necessary documents for the mortgage cycle. So it is very possible that we will see more and more mortgage cycles carried out by non-bank entities.
Against the background of the increase in interest rates, the financing difficulties of the borrowers increase and the banks refuse to sign mortgages. This is how we see the sharp declines in the purchase of apartments reported by the Office of the Chief Economist, when in the last review the number of apartments sold was 6,163, the lowest level since the first month of the outbreak of the Corona virus in March 2020 excluding seasonality.
There is no doubt that the banks could have sold the mortgages on, more borrowers would have been approved for a mortgage, and we would probably have seen an increase in purchases. But at what price?
Despite supervision that has proven to be problematic to say the least, despite the complete lack of transparency of information to the public, the Governor is working to expand the operations of non-bank entities through the Securitization Law. And we won’t know what’s going on until we hear about the next crash.
Talk today every morning with your email
#Bank #Israel #expanding #backyard #credit #market #Israel