BOI: Remarks by the Governor of the Bank of Israel at the Bank of Israel
conference on the financial system – "Macrofinancial Stability"
http://www.boi.gov.il/press/eng/120617/120617cl.htm

Office of the Spokesperson and Economic Information
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14.06.2012

A Bank of Israel conference on the financial system, "Macrofinancial
Stability" was held on Thursday at the Dan Panorama hotel in Tel Aviv. The
Governor of the Bank of Israel presented the opening remarks. The following
is a summary of his speech.

This conference is being held at a difficult time for the global economy,
particularly in Europe, but not only there—India and China, the "growth
stars" of recent years, are growing more slowly, and in the US as well, the
situation is unclear. Why, then, are we focusing on the financial system?
The main reason is that a financial system which is efficient, resilient,
not necessarily especially sophisticated—one which can finance the needs of
companies and households, is crucial to enabling economic growth. An
unstable financial system can cause tremendous harm to an economy.

In this regard I'd like to quote Reinhart and Rogoff, who recently wrote,
"After a normal recession (which for the average post-World War II
experience in the U.S. lasted less than a year), the economy quickly snaps
back; within a year or two, it not only recovers lost ground but also
returns to trend.

After systemic financial crises, however, economies of the postwar era have
needed an average of four and half years just to reach the same per capita
gross domestic product they had when the crisis started. We find that, on
average, unemployment rates take a similar time frame to hit bottom and
housing prices take even longer."

If you don't believe them you needs only to think about Greece, Ireland,
Iceland, Spain, the crisis in the US and UK, about Asia in the 1990s, and
others. For this reason, it is very worthwhile that we know to prevent
crises before they occur, and not to reach a point where we must deal with
them after the damage to economic activity has already been done.

How, then, will we be able to prevent financial crises? First, we must
manage the economy optimally, even in tranquil times. The state of the
financial system depends on the state of the economy: when the economy slows
down, companies run into difficulties, banks find it harder to provide
quality loans, and later on the financial system too is liable to face
problems. Second, we must watch and supervise the banking system, as we do
in the Bank of Israel. I have said in the past that in nine out of ten years
people tend to complain about the Bank of Israel's tight supervision of the
banking system, and only in one out of ten years are they thankful for the
existence of strict supervision. 2009 was the year in which, obviously,
everyone was happy. Now we are in 2012, and not everyone is satisfied…the
banking system has expressed its concern about the Bank of Israel's
intention to increase core capital requirements, worrying that these
requirements will make it difficult for the system to continue to provide
credit. This concern was taken into account by the Bank of Israel, and in
the end we reached a balanced decision which on one hand will allow banks to
continue to provide credit for the economy's continued growth; while on the
other hand it will strengthen the banks and place them at international
standards. Policies of supporting sustainable growth and maintaining banking
system stability are not mutually exclusive.

About 40 percent of the credit portfolio of banks in Israel is directed to
real estate, in a broad sense of the term—that is, real estate and housing
loans. While credit to construction and real estate is limited by an
industry limitation, there is no limitation on the component of the credit
portfolio that banks can assign to mortgages. Nonetheless, the Banking
Supervision Department closely monitors developments in the mortgage market,
and in recent years has taken several supervisory steps in order to reduce
the risk from this market. Historically, the mortgage market in Israel has
been considered stable, and there are quite a few people who say that we don’t
need to be worried by this market, that it was a problem in Israel. The
facts are correct, but history is packed with stories of financial assets
that were never a problem, until one day when they began to have problems.
So we must continue to monitor closely and ensure the stability of the real
estate industry.

I often hear, "the Governor is concerned about the stability of the banking
system and not about young couples". This is simply incorrect. We are
concerned about the stability of the banking system because we are concerned
about young couples—and older couples, and all Israeli citizens who are
affected by the economy and to whom it is important. Too many financial
crises—in fact, according to Renihart and Rogoff, about 50% of financial
crises throughout history, originated in the real estate sector. Therefore,
we will continue to manage a responsible policy in this area. The Bank of
Israel considers itself responsible for the banking system. However, this
responsibility does not mean that we are responsible for everything the
banks do. We expect the banks to conduct themselves responsibly, and this
includes their responsibility to their customers, including households and
small and midsized businesses.

A note about macroprudential supervision. I am happy to see that our
cooperation with the other regulators who supervise the financial markets is
rising a notch which will allow each of the supervisors to understand the
policies of the others, and to coordinate the activities of the various
supervisors, in order to ensure the stability of the financial system as a
whole. This is one of the most important lessons of the recent economic
crisis.

In conclusion—the situation in Europe is difficult, and there is a great
deal of uncertainty about the future. The roles of the Bank of Israel, the
Ministry of Finance, of every authotity responsible in one way or another
for economic policy in Israel, is to be prepared as much as possible for any
negative development which may occur in Europe. We do not know precisely
what will happen if one or two countries leave the eurozone. However we are
giving it thought, preparing various scenarios, and preparing to deal with
possible problems to the extent that they reach Israel. We succeeded in
dealing with an exceptionally large financial crisis, and I have great
confidence in my colleagues at the Bank of Israel and in our colleagues in
government authorities, and in our ability to deal with the crisis.