Why are they afraid of the Bank of Israel and why do the Treasury prefer to raise money overseas?



The Bank of Israel is very worried about what will happen to the real companies in the economy following the corona crisis, and it is clear that from the point of view of the central bank, the really bad thing is still ahead of us. The Bank’s financial stability report for the first half of 2020 indicates that the banks’ credit losses are expected to increase at a very sharp rate following the consequences of the corona crisis. In this context, the Bank of Israel is pushing commercial banks to increase the expenses they record in their reports due to credit losses, especially in group provisions aimed at preparing for a general deterioration.

According to an examination conducted by the Bank of Israel, through an examination of “extreme situations,” the central bank actually estimates that it is likely that the Israeli economy is on the verge of a tremendous deterioration, one that is not yet really felt but mostly threatening. Banks are also looking to the future with apprehension, and this has already been seen from the financial statements in the first quarter of this year, in which they presented large group provisions for the credit they provided to the public.

But while the Bank of Israel does not rule out a scenario of an expense rate for credit losses of 3.3% and even higher (with the number 4.7% given as the upper limit, for now), the banks say that this is an excessive expense rate that has no grip on the current reality. For comparison, in 2019 the rate of expenses for credit losses was only 0.3%. As a senior figure in the banking system has told us, there is currently no reason to talk about expenses for credit losses at a rate of more than what was already in the first quarter of this year. Hence, the Bank of Israel is much more pessimistic than the banks themselves.

Until now, the Bank of Israel and the banks have taken an “urgent and urgent aid of providing oxygen” approach to those affected by the crisis. This was reflected, among other things, in the release of the public from the need to repay loans “as usual” if there is a difficulty. This means that the problem has been postponed. A window of a few months in which loan repayments can be deferred. But that window will close sometime, and then we’ll find out who can repay the loans he took out and who are the businesses, companies and individuals who just can’t afford the loan repayments. The central bank, it seems, is preparing for a very problematic situation.

This insight can be deduced not only from what the Bank of Israel wants from the banks – which it is pushing to increase expenses for credit losses today (as a preliminary preparation for a surge that will probably come in the future, and which has certainly not yet arrived), at the expense of current profits. It is also gaining strength from another move recently led by the central bank, with its unprecedented intervention in the corporate bond market – a competing market and also complementary to the banks’ credit market.

About a month ago, the Bank of Israel announced that it was launching a plan to purchase corporate bonds in the secondary market, in a move that some saw as not required here and now. In doing so, the Bank of Israel clarified that the intervention is preparing for significant deterioration. That their purpose is to arrange the ground to reduce the damage to them if and when the surge hits.

This should also be seen as a critique of the government and the steps it is taking, some of which have drawn criticism from many economists – such as granting grants to the general public, including those not directly affected by the corona crisis, and providing long-term unemployment benefits.


There is a problem. On the one hand, the Bank of Israel wants to stimulate the credit markets and increase the supply of credit. To this end, he intervened in the corporate bond market – in order to smooth out problems in this market and facilitate the flow of credit to real entities. What’s more, the central bank reiterates that this is not a financial crisis – when financial entities have money and are stable, For small and medium-sized businesses (which do not reach the corporate bond market) and private individuals.

But increasing spending on credit losses – which the central bank is pushing for – also affects the supply of credit in banks. It’s not a committed thing, but it does happen. Increasing provisions for credit losses inevitably affects the granting of new credit, banking market sources tell us, noting that even if this does not have to be the case, in practice this translates into a reduction in new credit.

The Bank of Israel is trying to resolve this dissonance, among other things, by creating a mechanism that will allow banks to set up mortgage portfolios as collateral against credit as part of the special program, and in return receive loans from the central bank that will allow loans to small and medium-sized businesses. The conditions for this have not yet been determined and more work on the subject is required. So it’s too early to estimate how much this will roll into increasing credit from small business banks.


Speaking of credit, not only does the public need more loans than in the past following the corona crisis and pay for it – the state also borrows more, and it also pays a lot for it. In recent months, the state has significantly increased the rate of its debt raising, in fact ours – because the repayment is financed by the Israeli public (whether through tax payments or through damage to the services we receive, and a combination of the two). The need for this is clear and stems mainly from the necessity to finance the inflated deficit. These debt raises are reflected in an increase in issues on the local stock exchange, from a rate of NIS 4-5 billion in debt each month before the crisis to a level of NIS 10-13 billion now.

But not only that, the country is raising more and more debt abroad. If in the past there was debt raising abroad once a year mainly to maintain Israel’s relationship with the markets and investors in the world – then this year it is already something very unusual, which includes huge media and fundraisers. Smaller ones made “under the radar”.

Overseas fundraising, probably the first of its kind this year, was of declarative importance (which accompanied the fixing of very high interest rates for decades) due to timing (when in those days, for example, mutual funds redeemed tens of billions of shekels) and also included 100-year debt. Were significant because of the need to quickly raise money that the local market would have a very hard time providing.

But, they were also made at higher margins than could be obtained here, paying foreign underwriters and leaving “meat” to paper buyers (in a 30-year bond issued at the height of the crisis, investors gained about 10% about a week after the IPO, says a local capital market source). This has led to an overpayment of hundreds of millions of shekels, which some estimate at many hundreds of millions of shekels – which the public will pay over the years due to recruitment abroad.

Bottom line, because of the inflated deficit, there is no doubt that significant and large borrowings are needed, even abroad. The local market cannot meet them all. This, even if large enough borrowings on the local stock exchange can bring large international foreign players (who will not come here for A package that is counted in tens and not in hundreds of millions of shekels, and will join the local players).

But, and it seems that the Treasury also understood this in light of what happened in the recent “smaller” fundraisers, in which conversion costs are converted into shekels – the question of the cost of fundraising and financing abroad compared to the country is also a factor to consider. And beyond the (important) need to diversify funding sources. After all, a new geographic market we have issued or a new currency is not like a designer portfolio to boast about.

To conclude and regardless of the issue of issues abroad, we will mention that earlier this year the TASE filed a lawsuit in the amount of NIS 20.1 million against the Accountant General in the Ministry of Finance, for “the defendant’s refusal to pay the registration fee for trading bonds on the TASE.” “. The stock exchange claimed that the state had not paid it for years for the listing of the bonds, and ignored its inquiries on the subject. No letter of defense has yet been filed.


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