Israel's banks need to improve their capital adequacy and problem debt ratios to reach the average of Western countries, the Bank of Israel said on Sunday. Israel last May was one of five countries invited to begin membership talks with the Organisation for Economic Cooperation and Development (OECD).
The central bank said that based on financial soundness data through 2005 from the International Monetary Fund, Israel was ranked 14th of 22 OECD countries in terms of non-performing loans and 19th of 23 countries in terms of regulatory capital to risk-weighted assets - the key capital adequacy indicator.
"The banking system needs to improve in order to reach the average among OECD countries," the Bank of Israel said. Regulatory capital to risk-weighted assets - which measures the banks' ability to absorb losses at a time of realising credit risks - stood at only 10.7 percent in Israel compared with 12.2 percent on average among OECD countries.
The indicator that reports the assessment of non-performing loans - the rate of credit not accruing income out of total credit - in Israel stands at a similar level to that of the average among OECD countries at 2.3 percent.
But it changes when Israel's nonperforming loans are defined more widely. If the definition includes debts in arrears, then the indicator reaches 3.1 percent, and if the definition includes all nonperforming loans, it reaches 9.5 percent.
In 2006, both measures improved modestly, with the capital to risk-weighted assets edging up to 10.8 percent and overall non-performing loans indicator dipping to 1.9 percent, the Bank of Israel noted. "One hopes that this improvement will continue in a way that it contributes to strengthening the banks' position in the face of shocks," it said.