If students of global banking are looking for a lesson on counter-cyclical regulation, then Israel might be a suitable case study. During the US and European property booms that turned to bust in 2008, Israeli real estate prices and rents were declining slightly. Since 2008, Israeli real estate has soared by about 60%. Only one of the top five Israeli banks, Bank Hapoalim, suffered a loss due to financial market exposure in 2008, and all have since remained profitable.
The Bank of Israel (BoI), which houses the country’s banking supervision agency, has never been shy about calling the shots – it explicitly called for the departure of Hapoalim’s chairman in 2009 after its losses the previous year. As house prices rose, the regulator intervened. Loan-to-value ratios on mortgages are now capped at 75% for first-time buyers, 70% for other owner-occupiers and 50% for buy-to-let investors. The risk weighting assigned to mortgages was hiked to 50% for most mortgages, about five times higher than in many European countries. If the loan-to-value ratio exceeds 60%, the risk weighting on the mortgage is 100%.
