November 12, 2015
The Joint Team to Promote Securitization in Israel publishes its final report, and recommends that the securitization market be developed cautiously and in a measured fashion by removing obstacles.
The Interministerial Team for the Promotion of Securitization in Israel published its final report today, further to the interim report it published on August 12, 2014.
Bank of Israel Governor Dr. Karnit Flug: "The report, which reflects professional and fruitful cooperation among all of the relevant regulators, gave in-depth attention to learning the lessons of the global financial crisis. The recommendations included in the report will contribute to increasing the sources of financing in the economy, including for those providing nonbank credit, and will be able to lead to lower costs for credit to the business sector, including to small businesses, while contributing to the continued development of the credit market and to increased competition in the financial system."
Minister of Finance Moshe Kachlon: "This is a significant step that will lead to the sophistication of the capital market in Israel and to increased competition. The development of the securitization market will bring additional sources of financing into the capital market, will lower the price of credit, and will remove entry barriers. The team's conclusions take note of the lessons learned from the 2008 crisis, and the market will therefore be developed cautiously and responsibly. I thank the Joint Team for the work and cooperation involved in putting together this report."
The team concentrated on identifying the obstacles to the development of the securitization market in Israel, in areas such as taxation, regulation and accounting, and made various recommendations in those areas in order to remove those obstacles, and to move the market forward and developing it. The development of a securitization market could bridge investors (institutional and private) with originators and projects that are in need of credit (including small and midsized businesses, rental housing projects, and more). The advancement of securitization is expected to increase the range of sources of financing and the variety of investment channels available to institutional investors and the broad public. In addition, securitization may lead to an increase in the supply of capital in the economy and to lower prices for credit that the banking system provides to the business sector, including loans to the small and midsized business segment.
The Team's main recommendations:
* Making it possible to securitize a variety of loans and types of assets as part of a securitization transaction;
* Making it obligatory for the initiator of a securitization transaction to incur exposure of at least 10 percent of the credit risk of the securitized portfolio;
* Prohibiting complex securitization (CDO2 securitization);
* Determining that the disclosure principles in securitization transactions must provide the appropriate transparency in order for investors to understand the various aspects of the transactions and to properly price them;
* Establishing the terms for public offerings of securitization transactions, while imposing legal responsibility on the various participants in the transaction;
* The transfer of assets from the originator to the Special Purpose Entity (the SPE) that will issue the bonds will from a legal standpoint be classified as a true sale, and not as a loan, provided that the conditions that will be detailed in the law are met;
* Defining a dedicated neutral tax model for securitization transactions that will prevent tax distortions and double taxation;
* The rules that will be set out in relation to nontradable securitization by the Capital Markets, Insurance and Savings Department will be consistent as much as possible with the recommendations relating to tradable securitization, while maintaining the interests and benefit of the savers whose money is managed by the institutional investors.
The Team believes that removing the obstacles, and the rules set out, will assist in the measured and cautious development of the securitization market. This market should contribute to the continued development of the nonbank credit market, both through institutional investors and financial companies, and through nonfinancial companies that could securitize assets and independently raise money on the capital market rather than use the banking system. The development of this market will assist in promoting competition with the banking system, and make sources of financing more accessible and less expensive, particularly for small and midsized businesses and for households.
The Team's recommendations balance the important objectives of maintaining the stability of the financial system with making the domestic capital market more sophisticated.
Following the publication of the interim report, the Team called on the public to make comments and to respond to the recommendations that were published. Financial professionals, representatives of the banking system, and representatives of the public appeared before the Team to respond to the interim report. After hearing the positions of the public, the Team decided to make a number of changes to its recommendations, as detailed in the final report.
The changes in the final report include, among other things, the Banking Supervision Department's intention to allow the banking system to securitize a wide variety of types of credit, including loans to small and midsized businesses (SMEs). It was decided to leave the directive prohibiting complex securitization transactions in place, alongside other directives that will ensure the quality of underwriting and management of loans offered for securitization by the banks. It was also decided to change some of the legal conditions for the classification of a securitization transaction as a true sale transaction, as detailed in the draft law attached to the final report.