June 29--The Bank of Israel today published the findings of what would happen to the strength and stability of the banking system in an extreme situation like the second Intifada and deep recession in 2002. In such conditions with a sharp fall in output, consumption, and the real estate market, the banks would lose NIS 3 billion, reflecting negative returns on capital of 2.2%, and capital adequacy would fall to 6.1-8.3%. The assumption is that the Bank of Israel is thinking about a potential deterioration in the region's geo-political situation.
However, the Bank of Israel stresses that while the banking system and the entire economy would be seriously hit, there would be no danger to overall financial stability. The harm would be reflected in high losses in the banks' credit portfolios, half of it in the mortgage and real estate sector, and in the banks securities portfolios (assuming there would be sharp falls on the Tel Aviv Stock Exchange).
Although the Bank of Israel does not want the bank's capital adequacy to fall below 9%, it said, "The banks have a sufficient capital pillow to absorb difficult macro-economic shocks.
However, the Bank of Israel also stressed that its analysis of such an extreme situation does not take into account the liquidity situation, which could include major capital withdrawals by foreign residents and a loss of faith among investors.
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