Sunday, March 29, 2020

Israel cuts reserve requirement to ensure flow of credit

      Israel's central bank, one of the few central banks to have kept interest rates steady this year, lowered its capital requirement for regulatory purposes by 1 percentage point "to ensure the banks' ability to continue offering credit" during the coronavirus crises.
      The Bank of Israel (BOI), which has kept its key rate steady since raising it in November 2018, said its banking supervision department lowered the requirement for large banks to maintain a minimum Common Equity Tier 1 (CET1) ratio of 9 percent from 10 percent and to 8 percent from 9 percent for midsized and small banks.
      Israel's banks entered the coronavirus crises in a strong position, BOI said, adding they have large capital surpluses, strong liquidity ratios and high-quality credit portfolios.
     "Since the outbreak of the crises, demand for credit has increased sharply, and the risk level in credit provision has increased in parallel in view of the impact to the to the financial state of businesses and households," BOI said, adding it expects to use the capital that has been released to increase credit to businesses and households.
      Given their central role in societies, banks have always been required to hold certain amounts of capital to absorb unexpected losses. Years ago, capital meant gold or silver but today it comprises a many forms of stock or equity invested by its owners and shareholders, government and private securities and loans that generate interest.
      The requirements and methods of measuring capital has changed over the decades, with the most recent changes following the global financial crises. Banking regulators worldwide, grouped under the Basel Committee, tightened the requirements significantly to ensure banks would remain financially sound even during an economic or financial crises.
      CET1 is the most basic form of liquid assets that a bank can hold, such cash and stock.
      Another measure of reserve requirements is based on deposits at a bank. BOI has for many years set a 6 percent reserve requirement against demand deposits but the bank's statement did not say whether this ratio was changed.
       BOI said its decision to lower the capital requirement was in line with similar decisions in other countries and would be valid for six months and would be extended if necessary.
       In response to the crises, central banks worldwide have been slashing both reserve requirements and countercyclical capital buffers.
      The buffer was created after the global financial crises to ensure banks raise their capital during economic booms as a countercyclical measure so they can draw it down during a crises.
       BOI said the today's reduction of the capital requirement was based on the 2 percent capital buffer of each bank's total risk assets, an excess demand that went beyond the Basel standards to protect the country's banking system and the economy from unforeseen developments.
       BOI also instructed boards at banks to "re-examine their dividend and share buyback policies," in light of the material change in economic conditions, freeing up additional sources that can be used to provide credit and absorb losses, if necessary.
      This is similar to a move by the Czech National Bank (CNB).
      On March 16, when CNB cut its rate for the first of two times this month, it also cut the countercyclical capital buffer for its banks and said it expected banks to "refrain from a any dividend payouts or any other steps that might jeopardize individual bank's resilience."
       BOI's monetary policy committee is scheduled to meet on April 6. At its last meeting on Feb. 24, it maintained is key interest rate at 0.25 percent and confirmed its guidance that it expected to maintain the rate at this level for "a prolonged period."
       On March 15 the policy committee decided to carry out open market operations, offer repo transactions to financial institutions and purchase government bonds of various types and maturities "in necessary quantities" to ensure smooth functioning of the bond market.
      On March 23 BOI then said it would purchase 50 billion shekel of government bonds in the secondary market to ease the volatility in bond yields from a lack of liquidity and lower the cost of longer-term credit for firms and households as a complement to its low interest rate policy.



Post a Comment