The Bank of Israel estimates that the macro-stability risk decreased

The Bank of Israel today publishes the Financial Stability Report for the first half of 2021. The Bank of Israel's Financial Stability Report is published twice a year. In this report, the Bank's economists analyze the resilience of the local financial system, taking into account the main risks posed to it.
The current report reviews developments in the local and global financial system in the first half of 2021, when the local economy began to recover from the corona plague crisis and most of the restrictions on economic activity were removed, in parallel with slower recovery in other countries.
The report also addresses the challenges of the economy as it emerges from the Corona crisis and raises two risk scenarios, one of which relates to the increase in morbidity and the other to the level of financial asset prices.
• The Bank of Israel estimates that the macro-stability risk decreased during the period under review, as activity has recovered considerably since the end of the closure policy. The recovery process has also begun in the United States and European countries, and this is also having a positive effect on the Israeli economy
At the same time, developing countries are still in a health crisis, and the spread of the Delta variant is causing a renewed increase in the incidence of morbidity in developed countries and in Israel.
This situation raises the probability of renewing some of the restrictions on local activity and the fear of an increase in the financial risks that some of the business sector and in particular small businesses face.
• Central banks around the world continue to pursue an expansionary monetary policy. Against the background of the process of emerging from the crisis, the inflation environment has risen in many countries, especially the United States, and with it have risen long-term nominal yields.
According to central bank economists, economic policy makers in Israel, like many countries around the world, face two major challenges:
Continued support for economic activity, ie the management of fiscal and expansionary monetary policy. And macro-financial stability risks, i.e. rising asset prices beyond long-term economic factors.
The main emphases that describe the situation at the end of the surveyed half of the financial system in Israel:
• The recovery in the business sector, although significant, is not uniform - businesses that have not yet returned to the level of activity (in terms of employment) as prevailed before the Corona crisis are mainly small businesses and their activity is spread across different industries. On the other hand, an analysis of the situation of public companies shows that many of the industries - and especially industry, commerce and information and communications - did not experience any damage to profitability at the end of 2020.
• There was a decrease in the risk of significant losses on private credit: the rate of bank debt for which payments were deferred in the business sector and in the household sector decreased significantly, and there was an improvement in the rate of bad debts in the banking system. The liquidity rate among public companies in all industries is high, including industries particularly affected by the corona crisis, although at the same time the leverage rate among these companies has risen.
• The decline in investment in the construction industry in 2020 and the first quarter of 2021 affected the supply of apartments, an effect that will continue in the medium term. Therefore, the demand for the purchase of an apartment, which increased with the exit from the crisis, the reduction of the tax on investors and favorable financing conditions and the decrease in the relative share of transactions under the "price per occupant" program.
Since mid-2020, the volume of new mortgages has been growing at a high rate, against the background of an increase in the volume of transactions. At the same time, there has been an increase in the size of the average mortgage and the share of mortgages taken out has continued to rise at a high financing rate. However, the level of debt for housing in the economy is low compared to international, and even the limit on the financing rate is relatively conservative compared to advanced countries. In addition, the financial system's resilience to risk from the housing market is estimated to be high.
• The risk to the resilience of banks and insurance companies has returned almost to its pre-Corona level. Although the corona crisis affected the economic activity of the financial entities in Israel, the resilience of these entities remained high, and after the losses they suffered at the beginning of the crisis, they returned to profit towards the end of 2020. Although the risks of some damage to profitability are still higher than before the corona crisis, the uncertainty has decreased significantly, and with it the fear of damage to the stability of financial institutions.
Referring to the capital market, the Bank of Israel states:
• Stock prices rose in the first half of 2021 and corporate bond yields continued to decline and reached pre-crisis levels, while issuance activity increased, especially through equities, against particularly favorable financial conditions. Various indications point to an increase in investors' appetite for risk.