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.

Issues in Private-Sector Finance in Israel

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Economic Survey of Israel 2011

OECD.Associated Working Papers.Israel’s economy passed through the 2008-09 global downturn in relatively good shape but is now suffering alongside others from the continuing effects of the renewed global crisis, and geopolitical tensions have increased. Annualised quarter-on-quarter real GDP growth was 4.7% in the first quarter but had slowed to 3.4% by the third quarter. Much of the slowdown came from a deceleration in export growth, as world trade slowed significantly. The November 2011 OECD Economic Outlook 90 has real GDP growth at 4.7% in 2011 but less than 3% in 2012. All private expenditure components, domestic and foreign, should contribute to the slowing.

Early signs of weakness in the housing market may presage an imminent sharper-than-desired decline in prices. In monetary policy currency intervention has become somewhat less relevant recently as reduced growth prospects and falling inflation led the Bank to leave its policy rate unchanged from June to September and lower it for October. So far there have been no major failures in the financial sector but corporate bond markets remain a major concern, there is room to improve financial supervision, planned legislation to allow securitisation should proceed cautiously and the framework for saving in institutional funds could be improved.

Israel has avoided the challenging fiscal situation facing a number of other OECD economies. Nevertheless, there remain sharp trade offs in fiscal policy objectives between debt reduction, spending control and tax reform, which have been heightened by pressures from the recent wave of popular protests. Debt reduction should remain the top priority but also faster spending growth under the new fiscal rule is welcome. Therefore, ensuring revenues remain on track in the longer term remains a core challenge. This said, there has been an innovative shift to a two-year budget cycle and a significant improvement in the fiscal treatment of hydrocarbon resources.

Persistent weaknesses in per capita income growth and a high rate of poverty, especially among certain communities, remain key long term challenges for education and welfare policies. In addition, middle-class concerns have surfaced in the form of the recent ‘tent protests’, with complaints about the cost of housing and price levels in other sectors figuring prominently. There has been some good news in the latest PISA results and reasonable progress in education reform but a lack of progress in making employment and social policies more effective. In housing, tax settings excessively favour home ownership and housing support schemes extend well beyond assistance to low-income households.

The tent protest concerns are linked to debate about the level of competition in the economy and the role of Israel’s large family run business groups, which play a significant role in the financial sector and in many non-financial sectors too. Also, in the energy sector sluggish reform in electricity and concerns about competition in natural gas are a cause for concern.

Environmental issues arising from the production and use of energy are prominent. Israel’s greenhouse-gas emissions and related air pollutants are largely the result of electricity production and energy use in transportation. Significant emissions reductions are expected from an energy efficiency programme. Plans are also being implemented that aim to raise the contribution of renewable electricity generation. There is a need for better public transport and further development of vehicle taxation.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Economic Survey of Israel 2011

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