Yaron Amir: From the financial crisis to today - the stability of the
Israeli economy
Remarks by Mr Yaron Amir, Governor of the Bank of Israel, at the Annual Conference of the
Aaron Institute for Economic Policy, Herzliya, 16 May 2019.
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Summary:
The global economy is showing signs of a slowdown, but an analysis of the markets
and risks does not indicate a prudential risk level similar to what it was prior to the
2008 crisis.
The leverage rates in Israel are not high by international comparison, and the
financial system in Israel is more resilient than in the past. We must continue
monitoring and taking measures that will strengthen the resilience of the system.
It is important to maintain the improvement in the debt-to-GDP ratio, which is a
strategic prudential asset for the Israeli economy.
The technological improvements that have been adopted, and those that will be
adopted in the future, by the financial system have benefits, but also risks that we
must manage intelligently.
In my remarks today, I will relate to the question of whether recent developments in the global
economy bring to mind those of 2008. The answer is, No. Even though global forecasts are
being revised downward for the first time in a number of years, the intensity of those revisions is
much more moderate than prior to the global crisis. From a global point of view, most of the
sectors seem less vulnerable than they were prior to the Global Crisis. Regarding Israel, we can
say that the economy is in good shape, and the growth forecast currently seems stable. Despite
this, there are developments that we must take not of. I previously defined them as "grey clouds
on the horizon" that-should they worsen-could also affect Israel.
At the outbreak of the Global Crisis in 2008, there was a sharp and rapid decline in the global
economic growth forecasts, and the Israeli economy, like others around the world, was exposed
to the financial distress that developed, which was signaled in the stock indices, growth rates,
and unemployment rates. While the economy was negatively impacted by the financial crisis,
the effect as more moderate that most of the other advanced economies, due to the background
conditions that were prevalent in Israel at the time. The economy was robust after four years of
rapid growth; the various governments conducted a responsible fiscal policy for most of the time,
which led to a prolonged decline in the burden of public debt; and the deficit was near zero prior
to the crisis. These were accompanied by conservative management of the financial system,
particularly the banking system, which is closely supervised in Israel. This led to a situation
where, in contrast to many countries, there was no development in Israel of over-leveraging or
asset price bubbles.
These background conditions led to a situation where, despite the drop in the capital market, and
increased credit margins and risk premium in the economy, the financial institutions in Israel
were resilient. No institution collapsed, and in contrast to the situation in most of the advanced
economies, where dozens of banks collapsed and governments were forced to inject immense
amounts of taxpayers' money, the devolution of the crisis from the financial markets to the real
economy was avoided in Israel, and the public was spared immense damage. The main policy
lessons from the Global Crisis are that actions should be taken in advance to minimize the
IMF Chairman
risk of crises developing and the intensity of the damage from them.
Christian Lagarde described this well in coining the term, "The time to repair the roof is when the
sun is shining." Another important lesson is that when a crisis does happen, a rapid and
widescale response by monetary policy is required, using a variety of tools and rapid steps to regain
stability.
An in-depth look at the Israeli economy today shows that the economy's financial strength is
composed of a number of main layers:
1.The credit market and macroprudential measures: Household and small business
leverage in Israel is low by international comparison, and household debt in Israel has not
significantly increased over the years. The Bank of Israel was among the first central banks in
the world to implement macroprudential measures that succeeded in preventing overleveraging
despite the low interest rate, and enabled monetary policy to focus on achieving its main goals.
2.Risk-based supervision of the financial institutions: In the decade that has passed
since the crisis, the Banking Supervision Department has worked to strengthen the banking
system's capital buffers and its resilience against various shocks is constantly tested by the
Department through a variety of stress tests, the findings of which are implemented at the banks
under the Department's guidance. For instance, the stress test carried out in 2016 examined the
system's resilience to another global crisis, and its results showed that the banks would register
heavy losses in the credit portfolio, but that these would not put the stability of the banking
system at risk. I will provide you today with a first peek at the new stress tests conducted
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by the Banking Supervision Department this year, which will be published shortly:
tests examined the system's resilience against a serious domestic macroeconomic situation
resulting from geopolitical events. The results show that the scenario would have a significant
impact on the banking system, but that it is not expected to put the stability or strength of the
system at risk, even though some of the banks would register losses. The result shows the
efficiency of the demands posed by the Banking Supervision Department on the banks in recent
years in strengthening the banks' stability, chiefly the significant strengthening of capital. Despite
these results, we must not be complacent. We must continue thinking of where the next crisis
may come from, and continue monitoring and strengthening the system's resilience. The stress
tests this year also show that the risk in the housing credit portfolio is lower than in the other bank
credit portfolios. The quality of the housing credit portfolio has improved in recent years, as a
result of the more stringent criteria for providing mortgages (underwriting), resulting from the
Banking Supervision Department's directives over the years.
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3.Adapting the regulatory environment to the changing financial environment:
credit market is becoming more varied, and the increase in competition on the part of institutional
investors is changing the structure of private debt in the economy. These make it necessary to
adopt a more comprehensive regulatory vision. The current situation is that regulation of
nonbank financial entities, particularly regulation over the provision of consumer credit, is not
identical to regulation over the banks. While the difference in the nature of activity between the
entities justifies certain regulatory differences, it is important to make sure that these differences
do not develop into regulatory arbitrage, which may, under certain circumstances, create a
systemic risk. In this context, the Financial Stability Committee is an important element in
narrowing the regulatory gaps and identifying the risks.
4.Foreign exchange reserves: The foreign exchange reserves, which are a financial
security buffer for the economy, were increased significantly prior to the crisis, and their level in
relation to GDP has been maintained since then.
5.Fiscal responsibility: In the past decade, there was an impressive prolonged decline in
the burden of public debt. But in 2018, that debt increased slightly. In recent months, there has
been an apparent deviation from the deficit target, and the deficit level in Israel is particularly high
given the good state of the economy. The Israeli economy got a good illustration of the
importance of fiscal discipline during the Global Crisis of 2008, when the fiscal strength prior to
the crisis enabled fiscal and monetary policy to support a recovery. In comparison, during the
2002 crisis, the sharp increase in the deficit and in the debt-to-GDP ratio forced policy makers to
adopt a policy of restraint. The economy is currently in good condition, and the prolonged decline
in the debt-to-GDP ratio, as well as fiscal responsibility, provide security buffers for times of
crisis. In order to maintain this strategic asset, the new government will have to make fiscal
adjustments, and it is worthwhile making them while the situation is good, since they will be more
difficult to implement if economic conditions worsen. The required adjustments are a mix of
streamlining, narrowing the increase in expenditures, and increasing revenues, while
expenditures that support growth and increased productivity should be kept. The government
must plan the budgets for the coming years such that the path of the debt-to-GDP ratio doesn't
diverge, and that it returns to a downward trend over time.
To conclude, I would like to touch on possible future changes in the financial system, and to
discuss their possible benefits and their implications on stability. There are advanced financial
instruments that deepen the markets and contribute to economic efficiency. In this context, the
Israeli market still has where to advance, and we will all be better off for it. I will illustrate this
through the example of the securitization market. In Israel, this market is very small, and it is
difficult to conduct securitization transactions, since the appropriate legislative, taxation,
regulation, and accounting infrastructure is lacking. The lack of securitization negatively affects
the efficient allocation of the capital markets and economic efficiency, and the issue should be
advanced while providing a response to the inherent risks. The interministerial work on the issue
was completed a while ago, and the legislation must now be advanced. In addition, technological
innovations are changing, and will yet change, the map of financial opportunities and risks, in the
world as well as in Israel. The Central Credit Register and applications developed alongside it,
the project to enable easy movement from bank to bank, API open banking that strengthens the
customer's control over financial information and creates a new world of financial services, and
the establishment of faster payment infrastructure, will enable the broad public to make
payments and transfers, and in the future complex transactions, easily, rapidly, immediately, and
inexpensively, as new participants enter the payments market and competition increases. All of
these changes bring benefits, but also contain risks. The Bank of Israel is determined to support
the adoption of financial technologies while maintaining the system's stability and reducing risks.
Thank you.​