Latest Negative Rate Experiment Comes With a New Twist in Israel
Latest Negative Rate Experiment Comes With a New Twist in Israel
(Bloomberg) -- The Bank of Israel is going a step beyond the European Central Bank with new targeted loans at negative interest rates that come with strings attached.
While the Israel central bank’s benchmark rate remains just above zero, the monetary committee last week rolled out special loans for banks, provided they’re used to extend credit to small and micro businesses. Unlike a similar program operated by the ECB, the Bank of Israel is capping the rate that banks can charge the borrowers.
“If the Bank of Israel is giving such an attractive loan and giving it for four years, we want to make sure it’s going to the companies where it’s needed and at a low interest rate,” Deputy Governor Andrew Abir said in an interview Monday.
Unwilling to push official borrowing costs below zero, Israel’s central bank has looked to cut the cost of credit by purchasing government debt and channeling cheaper money to small businesses suffering from the coronavirus pandemic.
Usually around 10% of small businesses in Israel report serious difficulty raising bank credit, but according to data compiled by the central bank, that spiked to nearly 30% around April. Although the share has since fallen by half, it remains higher than for larger companies.
The new program offers 10 billion shekels ($3 billion) of four-year loans at minus 0.1%, against facilities the banks themselves make to small and micro businesses. It operates under the condition that their rate doesn’t surpass the prime rate -- currently 1.6% -- plus 1.3%.
The ECB’s targeted longer-term refinancing operations, known as TLTROs, also offer banks cheaper loans but without fixing rates or focusing on a particular sector. The central bank in Frankfurt has said that ultra-cheap funding is helping to support lending in the euro area and ensures liquidity has remained plentiful since the pandemic hit the 19-nation region.
While Israeli credit conditions tightened at the start of the pandemic, steps taken by the central bank have eased rates to pre-crisis levels and lending has rebounded. Critics have warned, however, that the central bank shouldn’t mandate what financiers can charge and that the effort could limit lending.
“A 3% spread is just not enough for your typical bank to go out and give credit to riskier businesses,” said Gil Bufman, chief economist at Bank Leumi Le-Israel, the country’s largest lender. “Competition would just create a situation where spreads would be as low as possible and this is not an area where the Bank of Israel should have intervened.”
The Bank of Israel introduced a program in April to offer banks three-year loans at 0.1%, contingent on providing credit to small businesses, and Abir said that the new plan was unveiled after the banking sector asked for four-year loans.
Israel’s central bank has complemented other stimulus with regulatory steps like easing lenders’ capital requirements and allowing for the deferment of payments.
Fiscal policy makers have also announced aid packages across the economy, including 18 billion shekels in government-guaranteed loans for small businesses. Abir said that the negative rate loans will likely be given “in conjunction” with the government’s guarantee, enabling banks to charge lower rates.
Setting a fixed rate for businesses is a way to ensure that banks pass on lower rates, said Megan Greene, a senior fellow at Harvard’s Kennedy School of Government. “That’s a really important innovation that other central banks should adopt,” she said.
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