The capital adequacy of the banks, a topic which generally only interests the five major banks and the regulator, has become a central factor in the recession in 2009. The equation is simple. The banks need more equity in order to increase their capital adequacy, and to increase capital they must reduce the rate of growth in credit. Credit is the oxygen of the economy and a fall in credit will deepen the recession.
In order to meet the minimum capital adequacy mandated by the Bank of Israel's Supervisor of Banks Rony Hizkiyahu, the banks need to find an extra NIS 4 billion. To increase the amount of credit in the economy by NIS 50 billion, the banks need to find an extra NIS 6 billion by the end of 2009. A year or two ago this would not have been a problem. But in 2008 the banks profits fell and in all likelihood in 2009 the profits will plunge. The losses from sub-prime investments are building up and the provisions for doubtful debts are rising. The banks will earn no more than NIS 4 - 5 billion this year.
This is where the rules of Basel II - The New Basel Capital Accord of the Basel Committee on Banking Supervision, which will become binding in 2009, come into the picture. Meeting the Basel II criteria does not obligate the bank to a particular minimum level of capital adequacy but it does create a system of tasks and burdens that influences banks' equity. The exact whys and wherefores are not yet known and therefore, Hizkiyahu, especially in light of the economic crisis, wants to create a strong safety cushion for the banks of 1% of the equity in order to confront the unknown. Adding 1% to the equity represents NIS 9 billion, an amount which the banks will need to raise by the end of 2011. This will be more or less the entire profits of the banks during the two years of the recession.
Leader Capital Markets VP research Alon Glazer said, "This is a practical target for the end of 2011 but the price will be high - the banks will need to raise a lot of money, distribute smaller dividends if any, and the question is how much growth in credit will there be. In the existing circumstances it won't be more than 2-3%, for above that will be impossible without raising significant capital."
And he is right. Hizkiyahu, for his part, is concerned about the stability of the banks. He claims that before credit is raised the banks must worry about their capital base and above all else they must be cautious. Hizkiyahu said two weeks ago, "Look what happened to the banks around the world that went wild."
So from where will the banks get the missing money? From the capital market which has dried up? From shrinking profits, or perhaps their owners? Somehow it's difficult to imagine Shari Arison, Matthew Bronfman, Zadik Bino, Sammy Ofer and Mozi Wertheim volunteering to put their hands in their pockets and pouring money into their banks. It is time to acknowledge the reality that Israel's banks do not have enough capital. There is enough capital to meet the regulators demands, and enough capital to increase credit to the economy, but not enough capital to meet both tasks. But the Ministry of Finance in Jerusalem does not seem to know that yet.
Published by Globes [online], Israel business news - www.globes-online.com - on January 21, 2009
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