Israeli Bank Capital Adequacy Framework

Israel’s bank capital adequacy framework is the set of prudential rules under which banking corporations must measure eligible capital against the risks and exposures arising from their activities. Administered by the Bank of Israel’s Banking Supervision Department, it combines risk-based capital requirements with a non-risk-based leverage measure and supervisory review of risks that may not be fully captured by minimum ratios. The framework is based substantially on Basel standards, adapted through Israeli banking directives. ^[1][2]

Supervisory and legal framework

The Bank of Israel supervises the stability of Israel’s banking system. Its Banking Supervision Department issues the *Proper Conduct of Banking Business Directives*, which establish requirements for banking corporations and, where specified, related entities. The Bank of Israel’s English translations are provided for convenience; the Bank states that the Hebrew text is binding. ^[1][3]

Directives 201–211 cover the capital framework’s scope, regulatory capital, credit-risk measurement, securitisation, operational and market risk, and capital adequacy assessment. Directive 218 addresses the leverage ratio. Other directives can affect capital measurement or exposures—for example, rules concerning large exposures and housing loans. The directive list is maintained by the Bank of Israel and may be amended through supervisory circulars. ^[1][3][4]

Israel adopted Basel III recommendations through amendments to its prudential rules following the global financial crisis. The Bank of Israel described the revised regulatory-capital directive as adopting Basel III recommendations, including stricter eligibility criteria for capital and a focus on Common Equity Tier 1 (CET1), the highest-quality capital category. The wider Israeli directives also incorporate Basel II and Basel III provisions, with national supervisory choices and adjustments. ^[5][6]

Regulatory capital

Under Directive 202, regulatory capital is divided into Tier 1 and Tier 2. Tier 1 is going-concern capital and consists of CET1 and Additional Tier 1 (AT1). Tier 2 is generally described in the directive as gone-concern capital. In broad terms, the categories distinguish capital expected to absorb losses while a bank continues operating from instruments intended to contribute to loss absorption in a resolution or failure scenario. ^[5][7]

CET1 is the core measure of common equity and retained earnings after applicable regulatory adjustments and deductions. The directive sets eligibility conditions for common shares and governs deductions, including treatment of certain investments in financial institutions and deferred tax assets. AT1 and Tier 2 instruments must meet separate eligibility requirements; a security does not qualify merely because it is described commercially as capital or subordinated debt. The directive also provides for loss-absorption terms at the point of non-viability. ^[5][7]

The composition of capital matters because two banks with the same total capital ratio can have different capacity to absorb losses if one has a greater proportion of common equity. Israeli reporting therefore distinguishes CET1, Tier 1 and total capital measures. Directive 202 also places limits on the contribution of some capital categories: among other provisions, Tier 2 capital may not exceed Tier 1 capital after required deductions, and qualifying Tier 2 capital instruments are subject to a further limit relative to Tier 1. ^[7]

Risk-based capital ratios

A risk-based capital ratio compares a specified regulatory-capital measure with risk-weighted assets (RWA). RWA are calculated by assigning regulatory risk weights to exposures under the applicable rules; they include exposures to credit, market and operational risk as specified in the directives. Because risk weights differ according to exposure type and regulatory treatment, RWA are not identical to a bank’s total balance-sheet assets. A higher ratio may result from more capital, lower measured risk exposures, or changes in the calculation of RWA. ^[3][8]

Israel’s current published baseline requirements are commonly described as a minimum CET1 ratio of 9% and a minimum total capital ratio of 12.5% for banks. Bank of Israel material has also described higher minimum ratios for the two largest banking corporations: 10% CET1 and 13.5% total capital. Requirements can differ by institution and may be affected by supervisory measures or specific directives; accordingly, these figures should be read alongside the current applicable directive and each bank’s disclosures rather than as a complete account of every institution-specific condition. ^[9][10]

The ratios are minimum requirements, not statements that every bank should operate exactly at the threshold. A bank’s actual capital level can exceed the regulatory minimum. The Bank of Israel’s first-half 2025 review reported an estimated system-wide Tier 1 ratio of approximately 11.5% at the end of that period and a total capital ratio of approximately 14.4%, compared with 14.3% in 2024. These are historical system aggregates, not current figures for any individual bank. ^[9]

Risk measurement and credit exposures

Credit risk is addressed through the standardised approach and, where permitted, an internal-ratings-based (IRB) approach. Directive 203 covers the standardised approach, while Directive 204 addresses IRB. Under the standardised approach, exposures are classified into regulatory categories and assigned risk weights in accordance with the directive. The Bank of Israel’s 2025 circular amended Directive 203 and the housing-loan directive, illustrating that the calculation of risk and capital treatment can change through subsequent rulemaking. ^[3][4]

Market and operational risks are also part of the capital framework. Directives 208 and 206 address market and operational risk, respectively; the Bank’s directive listing shows an updated operational-risk directive dated June 2024. Directive 205 concerns securitisation. The precise effect of a transaction on RWA depends on its features and the applicable rules; a general description cannot replace the technical calculations required by the directives. ^[3]

Leverage ratio

The leverage ratio supplements risk-based measures. It compares a capital measure with a broad exposure measure without applying the same risk-weighting process, providing a backstop to the possibility that risk weights or models understate aggregate leverage. Directive 218 describes the ratio as a simple, transparent, non-risk-based measure intended to limit excessive leverage and reinforce risk-based requirements. ^[11]

The published directive text sets a minimum consolidated leverage ratio of 5% and a higher 6% minimum for a banking corporation whose consolidated balance-sheet assets meet the specified large-bank threshold—24% or more of total banking-system balance-sheet assets. The ratio’s numerator is Tier 1 capital, while the exposure measure is based generally on accounting values and includes both on- and off-balance-sheet considerations as prescribed by the directive. Banks must consult the current operative version because the directive and related transitional or temporary provisions can be amended. ^[11][12]

Supervisory assessment and internal capital planning

Minimum ratios are complemented by supervisory assessment under Directive 211. Banks are expected to allocate adequate capital to support all material risks and to develop an internal process for assessing capital needs and setting targets consistent with their risk profiles and control environments. Management remains responsible for determining whether capital is sufficient beyond the core minimum requirements. ^[13]

The assessment includes risks that may be incompletely captured by minimum capital calculations, risks outside those calculations, and external factors such as business-cycle effects. The directive identifies areas including credit concentration, interest-rate risk in the banking book, business and strategic risk, stress testing, operational risk and securitisation. It also states that higher capital is not the only response to risk: improved risk management, internal limits, provisions and controls may also be needed. Capital is not a substitute for fundamentally inadequate controls or risk management. ^[13]

This supervisory process connects quantitative ratios with governance and risk management. It means that compliance with a published minimum does not, by itself, establish that a bank’s capital is adequate for every risk in its business. Supervisors may assess a bank’s capital planning, stress testing and risk controls, while bank management remains accountable for its internal capital assessment. ^[13]

Implementation, reporting and changes

The framework’s Basel III implementation included transitional arrangements for regulatory deductions and for instruments that did not meet the new eligibility criteria. Directive 299 set out a phase-in schedule for specified adjustments and deductions, reaching full application for the covered items from 2018. These provisions were intended to ease the transition to the revised capital rules; they are distinct from the continuing substantive requirements. ^[14]

Banks report and disclose capital measures under the applicable supervisory and public-reporting rules. Published Bank of Israel annual and periodic reviews aggregate system-level data and describe developments in capital and leverage, while individual banking corporations disclose their own ratios and calculations. Comparisons require care: reporting dates, consolidation scope, capital definitions and institution-specific requirements can differ. ^[9][15]

The rules are subject to change. In February 2026, the Banking Supervision Department published for public comment a draft supervisory framework proposing adjustments for small and new banks, including capital and leverage requirements. The Bank described this as a draft designed to tailor supervision to size, complexity and systemic importance; publication for comment does not by itself make proposed changes final or applicable. ^[16]

Interpretation

Capital adequacy ratios are prudential indicators, not direct measures of a bank’s profitability, liquidity or market value. Risk-based ratios relate regulatory capital to RWA, while the leverage ratio uses a broader, non-risk-weighted exposure measure. Supervisory assessment considers further risks and the quality of controls. A complete evaluation therefore distinguishes capital tiers, the applicable minimums, any institution-specific requirements, the date and consolidation basis of the reported ratio, and the status of any temporary or proposed rule. ^[7][11][13]