1 Survey of the Supervisor of Banks, 2008 Rony Hizkiyahu, Supervisor of Banks August 18, 2008

2 Survey of the Supervisor of Banks, 2008 The Israeli Banking System, 2008 Emphases in activity of the Banking Supervision Department, viewed through the prism of regulatory changes around the world

3 The Israeli Banking System, 2008 Continuing to keep the banking system resilient even as it becomes more exposed to risks: Return on equity (ROE)—poor (0.4%) Increase in credit risk—a significant increase in lending coupled with a decline in credit-portfolio quality and an upturn in concentration Increase in market and liquidity risks—in view of the evolution of the global crisis Increase in capital adequacy—commensurate with targets set

Activity of the Banking Supervision Department Stability of the banking system against the background of the developing crisis Progress in implementing Basel II Fairness and competition in the banking system Promotion and reinforcement of international relations

Activity of the Banking Supervision Department: Stability of the Banking System Comprehensive regulatory requirements for the banking system—emphasis on capital policy, risk-management processes, and principles of corporate governance Detailed disclosure requirements Regular surveillance of developments in foreign markets and regular close monitoring of the conduct of banks in Israel and their preparedness for these developments Regular dialogue with boards of directors and senior management

Activity of the Banking Supervision Department: Progress in implementing Basel II Implementation of Basel II by the banking system and at the Banking Supervision Department by the end of 2009, in accordance with schedules set forth Emphases in Pillar 2: - corporate governance - capital allocation on account of additional risks the ICAAP process

Activity of the Banking Supervision Department: Basel II —Emphases in Pillar 2 Selected issues in corporate governance: Work of the board of directors—responsibility for risk management and corporate governance Chief risk manager and an independent and effective risk-management function A remuneration policy that will not encourage risk- taking that exceeds the bank’s risk appetite

Summary Israel’s banking system is solid. This stability is a definitive factor in maintaining the domestic economy’s resilience at the present time. Three factors will make it possible to continue keeping the system stable: −conservative risk management −proper corporate governance −close supervision 8

9 THANK YOU

Return on Equity (ROE)1—Five Large Banking Groups, 1990–3/ Since Q1-2007, banks have been required to calculate their ROE using the method conventionally applied in the U.S. and other countries. Thus, ROE is calculated as net earnings less dividends on account of preferred shares that are not recorded as an expense in the earnings statement and were declared in the reporting period only, divided by average equity. Average equity, for this purpose, is total capital instruments less average outstanding entitlements of external shareholders less/plus the average balance of not-yet-realized losses/earnings on account of fair-value adjustments of tradable bonds, and also losses/earnings on account of salable bonds that are included in equity.

11 Ratio of Problem Credit to Total Credit, 2004–3/2009

Current Loan-Loss Provision as Pct. of Credit to the Public, 2003–3/ %

1. Including credit given by institutional investors, credit given by nonresidents, and private-sector holdings of corporate bonds (it being assumed that most such bonds are held by households, chiefly via mutual funds and portfolio managers). Source: Bank of Israel Information and Statistics Division Changes in Bank and Nonbank 1 Business Credit, 1999–3/2009 NIS billion

Rate of Revenue from Credit Issued, Deposit Expenditure, and Spread of Total Credit to the Public over Bank of Israel Rate, 12/2007–6/2009

Housing Loans—Performance 2004–6/2009

Housing Loans—Distribution by Types of Indexation 2004–6/ Source: reports to the Banking Supervision Department

Capital Ratio, Five Large Banking Groups, 2005–3/

Original Tier 1 Capital Ratio 2008–3/

Capital Adequacy Ratio in Selected Banking Systems 1, The minimum capital ratio in all countries is 8%, except for Israel and S. Africa, which require minimum ratios of 9% and 10%, respectively. 2.The data for Greece, the Netherlands, China, and Hong Kong relate to the end of Q1-2008; those for Austria, Spain, S. Africa, and Finland relate to the end of Q2; those for Australia, Norway, Poland, the U.S., Canada, Czech Rep., and Belgium relate to the end of Q3 of the year; those for Israel, Sweden, and Chile are as of year’s end. 3.Israel’s reference group includes five countries that resemble Israel in terms of size of GDP and banking system: Belgium, Greece, Norway, Finland, and S. Africa. Source of data: IMF, processed by the Research Unit of the Banking Supervision Department.