Irit Roth of Herzog Fox & Neeman in Tel Aviv looks at recent developments in the Israeli market
A combination of local circumstances and international developments is leading to a rapidly changing lending landscape in Israel.
Opening up the concentrated credit sector
Israel’s new Minister of Finance has entered office pledging to increase competition in Israel’s highly concentrated banking sector. The first measure being spoken of is to force the Israeli banks to sell off their credit card operations.
The idea of opening up the banking sector in Israel is not new. A Committee established in 2011 by the Bank of Israel and the Minister of Finance, charged with examining options for increasing competition in the banking market issued its final report in March 2013.
Certain recommendations included in the report have resulted in regulatory changes as well as legislative proposals. It is now possible to open accounts over the internet and to establish cooperative banks (although in reality establishment of such a bank is still far off), and it is easier to transfer activity from one bank to another. Banks will soon be required to offer debit cards to their customers, and the local “switch” will be required to allow access to parties other than banks and their subsidiaries.
In the pipeline are legislative proposals that will create a level playing field in consumer lending, removing existing barriers for non-bank consumer lending, and ensuring that borrowers’ credit history is generally available (and not just negative credit rating), thereby making it easier for borrowers to obtain credit.
The Supervisor of Capital Markets is considering regulation that will allow institutional investors such as provident fund managers and insurance companies to extend credit to the general public.
Additional proposed legislation will, if implemented, allow raising money on the capital markets for on-lending to borrowers, activity which is currently prohibited to a large extent by banking regulation.
On the institutional creditor side, regulatory concern over the corporate governance structure and risk management processes of institutional lenders in all matters relating to the extension of bi-lateral loans, participation in syndications and purchase of debt on the secondary market, have led to the introduction of rules regulating these activities. The rules require institutional lenders to receive certain information and to establish criteria for lending, as well as imposing on-going monitoring requirements. As some obligations are imposed on arrangers and agents, it is still unclear how the rules may impact future participation of institutional lenders in facilities arranged by banks which may be reluctant to adhere to these additional requirements. The rules entered into came into effect on August 1 2015.
Increased capital requirements following the implementation of the Basel III recommendations are leading banks to look at selling assets and seeking other solutions for capital relief. A number of recent groundbreaking transactions in Israel include asset sales, various credit derivatives and credit linked products. Proposed legislation on securitisation may also lead to securitisations of bank loans and mortgages, an area still undeveloped in the Israeli market.
Proposed new Israeli Bankruptcy and Economic Rehabilitation Law
The Israeli Ministry of Justice has recently (August 3 2015) published a proposal for the enactment of the Bankruptcy and Economic Rehabilitation Law 5775-2015 with the intent of reforming the insolvency procedures of individuals and corporations under Israeli Law (currently governed by the Israeli Bankruptcy Ordinance (New Version) 5740-1980, the Israeli Companies Ordinance 5743-1983 and the Israeli Companies Law 5759-1999 and the regulations promulgated thereunder). The proposed Law and the entailed reform would affect both the procedures and the substance of insolvency proceedings and, to the extent adopted by the Knesset (the Israeli Parliament), may have a significant impact on parties involved or who may be involved in insolvency proceedings, either as creditors or debtors.
The Ministry has highlighted a number of key objectives for the proposed legislation and the amendment of the insolvency procedures, including (i) increasing the likelihood and ability of the debtor to rehabilitate himself, (ii) increasing the unsecured creditors' share in any distribution of the bankrupt's assets at the expense of the secured creditors, (iii) shortening the proceedings and the bureaucracy involved in the insolvency proceedings, and (iv) increasing the level of clarity surrounding debtors' solvency status.
On the substantive level, the proposed Law will replace the solvency test applicable to debtors with a new test based on the debtor's ability to meet his obligations as they mature, rather than the current test, which examines the “balance sheet” of the debtor – do liabilities exceed assets? – as well as the anticipated liquidity of the debtor.
In addition, the proposed Law will limit a creditor's ability to commence insolvency proceedings against a debtor prior to the maturity of the debtor's obligations only to extreme cases of debtor fraud. These proposed amendments would allow debtors to plan how to settle their obligations with clarity, based on the maturity dates of the obligations, with limited risk of insolvency proceedings commencing prior to such dates.
The proposal also suggests limiting the secured creditors' right to the proceeds of the bankrupt's assets to 75% of those assets, notwithstanding any other contractual agreement, with the remaining 25% of the proceeds of the assets being distributed among unsecured creditors. Israeli banks and financial institutions will no doubt object to this revolutionary proposal. If the proposal is entered into law, it will be interesting to see how it affects the banks’ willingness to lend and how secured creditor banks will “price” this additional risk component.
Herzog Fox & Neeman
About the author
Irit has worked in the banking and finance sector from 1995, of which she served as in-house counsel for more than 16 years, first in the legal department of the First International Bank of Israel and for over eleven years as legal counsel for Citigroup in Israel. In this role, Irit was involved in establishing Citibank's branch in Israel and in the development of Citi's operations in Israel. She handled a variety of large transactions in addition to regulatory affairs and legislation initiatives.
Irit focuses her practice on banking and finance, covering both financial services regulation and transactional matters, including derivatives and financial instruments, with a specialization in anti-money laundering and compliance.