1 The Global Crisis and Israel’s Banking System TheMarker Conference Rony Hizkiyahu, Supervisor of Banks

2 The development of the global crisis The subprime crisis in the US The spread of the crisis into other countries The deterioration of the crisis in the financial system and the capital market The the real economy crisis

3 Measures taken by governments and central banks in different countries Far-reaching steps taken: Injection of capital into the banking and financial system; nationalization of banks Purchase of problem assets from the financial system Guarantees for debts of the banking system Cutting interest rates Extending the use of collateral; recognizing additional collateral Trading with the banks

4 Recognizing the importance of stability in the banking system Emphasis on a stable banking system as an essential factor for protection of the economy The special situation of the banking system due to the need to protect the public’s deposits The importance of public confidence in the banks The importance of the banking system as a major factor in the financial system The contagion effect

5 Israel’s financial system before the crisis The banking system A relatively low risk level: high capital adequacy; high ROE (return on equity) High level of problem debts, on a downward trend; low loan-loss provision Was in process of reducing classic bank intermediation Law reliance on credit lines from abroad or on capital markets ( mortgage banks). The capital market Conservative, little financial innovation: - Few or no hybrid instruments (repo, securitization, CDO, etc.) - Relatively conservative market operators A strong banking system before the crisis

6 The banking system in crisis Activity in hybrid instruments (mbs, siv, cdo, etc.) Exposure to abroad (to foreign institutions, deposits in institutions abroad, activity of overseas offices, investments abroad, etc) Credit exposure, exposure to large borrowers Exposure to domestic capital market Exposure to market risks (exchange-rate, interest, index, etc.) The banking system is stable, and is taking steps to reduce exposure and risks

7 Challenges facing the banking system Global challenges To continue dealing with the global crisis and its effects on Israel’s banking system and economy Domestic challenges -- Dealing with the adverse effects on the financial markets: lack of a capital market, reduced sources of credit -- The slowdown expected in the real economy: slowdown in growth, increase in unemployment, decline in exports, reduced level of investment, decline in GDP and in consumption The banking system must prepare itself to deal with further worsening of the crisis

8 Activity of Bank Supervision Department Constant monitoring of developments in world markets and close monitoring of the conduct of banks in Israel and their preparations for these developments Ongoing dialogue with boards of directors and senior bank management Comprehensive regulatory requirements Detailed disclosure requirements Implementing Basel 2 in the banking system and in bank supervision in accordance with the original plan Cooperation with the Ministry of Finance in promoting the “acceleration plan” (to boost growth)

9 Summary Israel’s banking system is sound. However, it is essential that we Continue to maintain the stability of banks Ensure close and appropriate supervision of the banking system Tighten the cooperation between the supervisory authorities Draw conclusions from the crisis in the banking system

10 THANK YOU

11 30 % Total Capital Ratio, ROE Five Major Banking Groups /2008

12 Ratio of Annual Loan-Loss Provision to Total Credit Risk Five Major Banking Groups, % /2008

13 The “Contestability” in the Credit and Deposit Markets 1993 – 6/2008 Source: Return to the Supervisor of Banks, Annual Report of the Commissioner of the Capital Market, Insurance and Savings, The Tel Aviv Stock Exchange and the Bank of Israel. NIS billion 10 The difference between the public assets in non-banks and bank deposits (right scale) The difference between credit substitutes and bank credit (left scale)