Monday, December 19, 2011

Issues in Private-Sector Finance in Israel

OECD Economics Department Working Papers.The 2008-09 global financial crisis did not result in the failure of any major financial institution in Israel, but it did reveal vulnerabilities in the non-banking sector – particularly in the corporate-bond market. Conservative regulation of the banking sector helped this segment avoid a financial meltdown, and low loan-to-value ratios in mortgage lending are undoubtedly helping limit the pace of house-price increases.Nevertheless, as elsewhere, capital requirements and stress tests for banks have been ramped up. Also the identification and monitoring of systemic risks and macro-prudential problems has intensified. In the Israeli context somewhat unusual issues arise from the control of most of Israel‟s major financial institutions by family-based business groups that have significant interests in non-financial sectors of the economy. This close link between the financial and non-financial sectors generates potential risks to financial stability, and it is a key issue in a wider debate about the relative merits of the business groups in terms of competition and control in the economy.

Private-sector finance, i.e. the process of intermediating between savings and investment by households and businesses, is core to market-based economies. Policies influencing primary lending and borrowing and the structure, conduct and performance of financial intermediaries affect the welfare of households, the growth and profitability of the business sector, and overall macroeconomic performance and stability. Although Israel‟s financial sector survived the 2008-09 global crisis without the collapse or rescue of any financial institutions, the credit crunch was nevertheless severe. Vulnerabilities were exposed during this episode, and the renewal of unusually turbulent conditions in global financial markets has generated fresh concerns, although Israeli banks and financial institutions are not believed to have significant direct exposure to troubled European sovereign debt.

Hemmings, P. (2011), “Issues in Private-Sector Finance in Israel”, OECD Economics Department Working Papers,No. 913, OECD Publishing.