Tel Aviv - Israel’s financial system remains stable but could be at risk if China’s economic problems worsen and turn into a global crisis, the Bank of Israel said on Monday.
The system could also face declines in asset prices if the risk premium rises or economic growth weakens unexpectedly, the central bank said in its semi-annual financial stability report.
It noted that threats to global financial stability have shifted from the advanced economies to the emerging economies.
“In particular, the risks derived from the Chinese economy, from the continued decline in commodity prices, and from the emerging markets with high foreign currency debt, have come into sharper relief,” it said.
But all of those risks should have a limited effect on Israel as long as they do not spread to the advanced economies and ignite a global crisis, the report said.
Among those risks, a crisis in China that may spread to countries that it trades with “was found to be more significant from Israel’s standpoint than the risk of a decline in commodity prices or the risk of a debt crisis”, especially if their currencies weaken sharply versus the shekel.
The central bank’s benchmark interest rate stands at 0.1 percent - down from 3.25 percent in 2011 - as a result of the slow recovery from the global financial crisis and a disinflationary trend that turned into deflation last year.
The Bank of Israel is widely expected to start raising the rate later in 2016.
The report noted that as in other advanced economies, low interest rates and flattening of the yield curve in Israel have led to a sharp increase in asset prices, which has created risks once rates start to rise.
“While an increase in yields globally and in Israel is excepted to come against the background of healthy growth, if that growth is weaker than previously estimated, or if yields increase as a result of an increase in the risk premium, asset prices may decline, which will negatively impact investors,” it said.
The financial system’s exposure to the housing market constitutes a significant risk because the banks have substantial exposure to the real estate industry and mortgages.