Regulating the Linkage of Mortgages

In the first 50 years of Israel's existence, most financial transactions were linked to the Consumer Price Index, since the nascent economy suffered from chronic inflation. This trend has changed in the last ten years, along with the low inflation rate. Currently, most loans are linked to the fluctuating interest rate. In May 2011, the Supervisor of Banks, from the Central Bank, the Bank of Israel, imposed controls on the mortgage system by limiting the percentage of the mortgage linked to the Inter Bank rate to one third of the debt. This regulation can be explained by the difference in attitudes toward risk estimates on the part of the Bank of Israel as compared to debtors. This paper discusses classical measures of risk such as standard deviation, skewness and kurtosis that are often implemented by debtors, and the value at risk (VAR) estimates that were used by the Supervisor of Banks. These measures account for the new regulation imposed on mortgage banks.