Israel: Corporate Bond Purchase Program

The Bank of Israel (BoI) announced the CBPP in a July 6, 2020, press release, stating that the purpose of the facility was to “to ensure the continued orderly functioning of the corporate bond market, and to strengthen the passthrough from monetary policy to the credit market, by reducing the interest rate at which companies issue credit in the capital market, and making additional sources of credit available for all industries” (BoI 2020h). The BoI’s Monetary Policy Report indicated that “even though there wasn’t a market failure [in corporate bonds] at the time,” the bond-purchasing program could usefully serve other goals including credit-easing and monetary policy passthrough (BoI 2021).

The CBPP was announced with two other Monetary Committee decisions that shared the goal of extending credit to corporations. The first decision expanded a program to provide 0.1% interest (the primary credit rate), three-year loans to banks, contingent on their extending credit to small businesses.^FNLater, the BoI announced that it would provide loans at a negative interest rate (-0.1%) and set caps on the interest rates that banks could charge businesses (BoI 2021c, 4). The program was first announced on April 6, 2020, and extended NIS 4.6 billion to banks through the end of May. The press release announced that it would continue the program indefinitely, with no limits on total program size. The second decision was to establish “an operational and legal infrastructure to enable banks to put up mortgage portfolios as collateral against credit” (BoI 2020h). By expanding collateral, the BoI hoped to enable “banks to extend credit under this plan at lower cost while maintaining high liquidity” (BoI 2020h).

Prior to July 6, the Bank of Israel announced a number of emergency measures to ensure market functioning:

• March 15: government bond purchases in the secondary market (BoI 2020d)
• March 15: repo transactions with government bonds as collateral (BoI 2020d)
• March 16/18: dollar/shekel swaps to provide dollar liquidity to the financial sector (BoI 2020e)
• March 23: NIS 50 billion Asset Purchase Program for government bonds (BoI 2020f)
• April 6: NIS 5 billion in 0.1% interest, three-year loans to banks, contingent on credit extensions to small businesses (extended indefinitely July 6) (BoI 2020g)
• April 6: acceptance of corporate bonds rated AA or higher in repo transactions (BoI 2020g)

The BoI did not cite the legal authority upon which it relied for the CBPP. Chapter 5, section 36(2) of the Bank of Israel Law of 2010 specifies that to achieve its objectives the BoI may:

The BoI has three primary objectives, as specified by the Bank of Israel Law: (1) maintaining price stability; (2) supporting the “Government’s economic policy, especially growth, employment, and reducing social gaps”; and (3) supporting financial stability (Government of Israel 2010, chap. 2.3). The corporate bond purchase program was perceived as an unconventional monetary instrument consistent with the BoI’s objectives.

Parliament passed the Bank of Israel Law of 2010 to reform the relationship between the Government and the BoI by granting the bank more independence and legally solidifying its mandate of price stability. Efforts to strengthen the BoI’s powers began in 1985, following a period of high inflation and a high degree of government involvement in the BoI’s policies (Krampf 2015).

The Monetary Policy Committee (MPC) within the BoI authorized the program and specified key details of its operation (BoI 2020h).

The Bank of Israel Law of 2010 sought to formalize the BoI’s publication of data to increase transparency and accountability (OECD 2011). Section 55 of the Bank of Israel Law requires that the BoI publish a report on monetary policy, “price stability and economic developments” at least twice yearly (Government of Israel 2010, sec. 11.55). These reports were discussed by the Governor before the Knesset (Israel’s parliamentary body) Finance Committee (Government of Israel 2010, sec. 11.55). The Bank of Israel Law also mandates that the BoI report twice a year on management of foreign exchange reserves to the Minister of Finance (OECD 2011). Section 57(g) of the Bank of Israel Law requires that the Financial Stability Committee report on emergent systemic risks to the Prime Minister and the Minister of Finance (Government of Israel 2010, sec. 57[g]). The BoI published financial stability reports for both the first and second half of 2020 (BoI 2020j; BoI 2021d).

The Governor of the BoI was additionally required to submit a report on programs related to monetary policy to the Advisory Council, a group made up of members of “banks, private sector, academic settings, the accounting profession, the Ministry of Finance, the Israel Security Authority (ISA), and the public” (OECD 2011).

The BoI purchased corporate bonds directly, and did not rely on a financial intermediary (BoI 2020c). The BoI’s Market Department/Dealing Room staff executed purchases. The BoI purchased corporate bonds consistent with a broad portfolio of bonds, representative of the market at large (BoI 2020h). The Information and Statistics group within the BoI published corporate bond aggregates, by grouping marketable bonds by industry and rating (Bachar and Last 2019). The BoI created a specific, “tailor-made” benchmark for this program (“saman”) (BoI 2020c).

The BoI did not rely on financial intermediaries to execute its corporate bond purchases (BoI 2020c).

On March 19, Deputy Governor Andrew Abir told reporters that if the BoI saw “a continuation of distress in the corporate market after the government’s plan, then surely we should take into account the possibility of buying corporate bonds” (Pilot 2020). On March 18, 2020, the chief executive of the Israeli Association of Public Traded Companies, Ilan Flato, called on the Bank of Israel to “be the responsible adult and start intervening in the corporate bond and stock markets” (Reuters Staff 2020).^FNFlato also emphasized that the “Bank of Israel buys foreign stocks and bonds every month and it’s time to step in…and also support purchases in the local market” (Reuters Staff 2020). Throughout 2020, the BoI invested foreign exchange reserves in foreign equities and corporate bonds, a practice that began in 2012 following the adoption of the new Bank of Israel Law in 2010 (BoI 2012). As of the end of 2020, 15% of Israel’s foreign exchange reserves were invested in foreign equities, 14% in spread assets, and 7% in corporate bonds (BoI 2021e). The BoI did not indicate that it would start buying corporate bonds on March 18, though it stated that it had “taken and [would] continue to use its policy tools to further support the Israeli economy” (Reuters Staff 2020).

On July 28, after the program’s creation, the Deputy Governor of the Bank of Israel, Andrew Abir, articulated the goal of the CBPP at a Tel Aviv University conference:

In the annual report for 2020, the BoI explained that the goal of the program was “to assist in lowering the costs of financing to large businesses that raise credit in the capital market,” a slight departure from the program’s original purpose of helping monetary passthrough and improving market liquidity (BoI 2021c).

The BoI published aggregated data on corporate bond purchases once a month, as it did with its other COVID-19 programs, though it was not required to by legislation (BoI 2020c).

The BoI published aggregated corporate bond purchase data each month on its website (BoI 2021f). The BOI published its FX and other asset purchase operations monthly on a voluntary basis. The BoI additionally submitted reports semi-annually on monetary policy, foreign exchange reserve management, and systemic risk and financial stability.

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The CBPP was authorized to purchase NIS 15 billion of eligible corporate bonds (BoI 2020h). Ultimately, the BoI purchased NIS 3.5 billion of eligible bonds (BoI 2021f).

Purchases were funded through an expansion of the BoI’s balance sheet (BoI 2020a). Prior to 2009, the BoI had a policy of sterilizing bond purchases by issuing one-year treasury securities (“makam”) so that the monetary base remained unchanged. After April 2009, the BoI reduced makam issuance and since then excess liquidity has been absorbed through increased bank deposits at the BoI (OECD 2011). In 2020 bank term deposits declined NIS 171 billion (BoI 2021c, 123). The BoI used NIS 33 billion in makam (BoI 2021c). In recent years, sterilization of FX and APP operations is done via deposits, while the stock of makam is relatively stable.

Only Israeli companies’ bonds were eligible for purchase through the program (BoI 2020h). Bonds rated A- and above were eligible for the facility, which as of December 31, 2019, encompassed 92% of the market, including both investment-grade and high-yield bonds (Bachar and Last 2019). As of year-end 2019, the majority (64%) of marketable corporate bonds came from the real estate and construction, and banking sectors (See Figure 5).

Source: Bachar and Last 2019, 7.

According to a representative of the BoI, the Bank conducted purchases via the stock exchange throughout the trading day, purchasing bond-by-bond, and did not use passive instruments like ETFs.

The BoI purchased corporate bonds in the secondary market (BoI 2020h).

The BoI purchased only corporate bonds rated A- and above by the local ratings agencies (Midrog or Maalot), with maturities over six months (BoI 2020c). Israeli corporate bond ratings differ from international ratings: the program covered all investment grade and some high-yield bonds. Eligible bonds could not be issued by foreign companies and could not have an option to convert to shares (BoI 2020c). The BoI would not purchase contingent convertibles (CoCos), foreign currency denominated bonds, or non-fixed-rate bonds (BoI 2020c). The BoI said it would purchase bonds from insurance companies that constituted secondary or tertiary capital so long as the bonds were not convertible into shares (BoI 2020c). The BoI would not sell bonds that were downgraded after purchase (BoI 2020c).

These criteria covered 75% of the market value for Israeli corporate bonds (BoI 2020h). Approximately 92% of marketable bonds in March 2020 were rated A- and above (Bachar and Last 2019).

The BoI aimed to purchase a broad portfolio of bonds, representative of the market at large. To this end, the BoI constructed a marker (“saman”), or a benchmark, that had a sectoral breakdown that represented the distribution of the market, excluding debentures. The bonds in the marker changed over time, and the BoI published the marker characteristics (BoI 2020c).

This Key Design Decision does not apply to the BoI's purchase program.

This Key Design Decision does not apply to the BoI's purchase program.

This Key Design Decision does not apply to the BoI's purchase program.

This Key Design Decision does not apply to the BoI's purchase program.

This Key Design Decision does not apply to the BoI's purchase program.

This Key Design Decision does not apply to the BoI's purchase program.

This Key Design Decision does not apply to the BoI's purchase program.

This Key Design Decision does not apply to the BoI's purchase program.

In the BoI’s questions-and-answers sheet published shortly after the decision, the BoI said that it would continue purchases depending on market conditions (BoI 2020c). Ultimately, it made purchases only between July 2020 and November 2020 (BoI 2021f). On November 22, 2021, the BoI stated in a press release that the program would be formally wound down by December 2021, though the bank would continue to hold assets to maturity (BoI 2021a).