Industry Indebtedness Limitation

Supervisor of Banks: Proper Conduct of Banking Business [28] (10/24) Industry Indebtedness Limitation Page 315- 1 ONLY THE HEBREW VERSION IS BINDING Industry Indebtedness Limitation Introduction

1. Credit portfolio concentration, including credit concentration by industry, is one of the
   sources of credit risk at banking corporations. Due to the recognition of the negative impact that per-industry concentration has on the quality of the credit portfolio at banking corporations, limitations on total indebtedness to a specific industry were set. Application
2. (a) This directive shall apply to a banking corporation, except for a joint service
   company.
   (b) This directive shall also apply to a corporation as detailed below as if it were a banking corporation—a corporation of the type noted in Sections 11(a)(3a) through (3b) and 11(b) of the Banking (Licensing) Law, 5741-1981 (hereinafter, “the Licensing Law”)—that was incorporated in Israel and that is controlled by a banking corporation, unless all of the following apply to the controlling banking corporation:
   (1) Includes it in its financial statements on a consolidated basis (2) Granted it indemnity for all its undertakings (3) Maintains an effective control system for monitoring the fulfillment of the limitations on a consolidated basis. (c) This directive applies to indebtedness at the banking corporation’s offices in Israel alone (on an unconsolidated basis).
3. Canceled.
   Definitions
4. “Indebtedness”—(a) Total indebtedness as per its understanding in Proper Conduct
   of Banking Business Directive no. 313, except for investments in equities, except for total undertakings (including contingent ones) of the banking corporation to extend credit or to issue guarantees and excluding guarantees given by the borrower

Supervisor of Banks: Proper Conduct of Banking Business [28] (10/24) Industry Indebtedness Limitation Page 315- 2 ONLY THE HEBREW VERSION IS BINDING to a third party to guarantee an indebtedness that the third party received from the banking corporation; (b) Notwithstanding the above, the indebtedness of an industry against which the banking corporation bought credit protection that is suitable for the purposes of reducing credit risk as noted in Directive 203, shall be classified in accordance with the activity industry of the protection provider. “Industry”—The definition of the industries is detailed in the appendix to this directive, and is based on the list in Directive no. 831 in the “Reporting to Banking Supervision Directives” file.
5. Limitations
(a) The total indebtedness of a specific industry to a banking corporation shall not exceed 20 percent of the public’s total indebtedness to the banking corporation. (b) Notwithstanding the provisions of Section (a), the indebtedness of the construction and real estate industry is to be limited to the following rates:

1. Total indebtedness of “Construction, real estate, and manufacturing and trade
   of nonmetal construction materials” (Industry 11 in the list of industries appearing in the Appendix to this directive), excluding indebtedness for financing projects with public sector-private sector collaboration included in Industry 42 “Civil Engineering Works” in the Standard Industry Classification (2011), shall not exceed 20 percent of the public’s total indebtedness to the banking corporation;
2. Total indebtedness of the “Construction, real estate, and manufacturing and
   trade of nonmetal construction materials” (Industry 11 in the list of industries appearing in the Appendix to this directive), shall not exceed 24 percent of the public’s total indebtedness to the banking corporation; (c) The percentages noted above shall be calculated on an unconsolidated basis.
3. Deductions
   A banking corporation may deduct the following from the indebtedness:
   (a) Amounts that may be deducted as noted in Section 5 of Proper Conduct of Banking Business Directive no. 313, provided that said deduction against sale

Supervisor of Banks: Proper Conduct of Banking Business [28] (10/24) Industry Indebtedness Limitation Page 315- 3 ONLY THE HEBREW VERSION IS BINDING guarantees shall be made before weighting said sale guarantees as noted in the definition of indebtedness. The deduction shall be made only from the numerator. (b) The present value of the amount of rent in respect of income-yielding real estate that is rented to a bank or to the Government of Israel, provided that:
(1) The amount of said rent is pledged to the banking corporation and may be utilized if the customer does not meet the terms of the indebtedness; (2) There is an irrevocable undertaking by the renter to pay the rent directly to the banking corporation; (3) The rental cannot be terminated prior to the end of the rental period. (c) The indebtedness of a company that does not deal in construction in Israel, which is designated for purchasing real estate abroad (in this matter, “Israel” includes Judea, Samaria, and the Gaza Strip). Deviation
7. A banking corporation in which a deviation from the limitation detailed in this
Directive has developed shall notify the Banking Supervision Department of it without delay, together with a plan to end the deviation as soon as possible. Reporting
8. A banking corporation shall report to the Banking Supervision Department once per
quarter regarding its compliance with the limitations detailed in this Directive, in the reporting format in Directive #809 of the Reporting to Banking Supervision Directives. Temporary directive 8a. Notwithstanding the provisions of Section 5(a) above, until the end of 24 months from December 31, 2027, the indebtedness of the “Financial and insurance services” industry (industry 18 on the list of economic industries in the Appendix to this directive) shall be limited to the following percentages:

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1. Total indebtedness of “the “Financial and insurance services” shall not
   exceed 25 percent of the public’s total indebtedness to the banking corporation, provided that the share of indebtedness does not exceed the higher of the percentage that applied on December 31, 2027 or the percentage established in
   Section 5(a) above.
2. Each one of the following indebtednesses separately shall not exceed the
   share established in Section 5(a):
   (a) Total indebtedness of companies in “the “Financial and insurance services” industry for which their main activity is in Israel; (b) Total indebtedness of companies in “the “Financial and insurance services” industry for which their main activity is outside of Israel;
3. Notwithstanding the provisions of Section 5(b) above, until the end of 24 months from
   December 31, 2027, the indebtedness of the “Construction, real estate, and manufacturing and trade of nonmetal construction materials” industry (industry 11 on the list of economic industries in the appendix to this directive) shall be limited to the following percentages, provided that the share of indebtedness does not exceed the higher of the percentage that applied on December 31, 2027 or the percentage established in Section 5(b) above:
4. Total indebtedness of the “Construction, real estate, and manufacturing and
   trade of nonmetal construction materials” industry (Industry 11 in the list of industries appearing in the appendix to this directive), excluding indebtedness for financing projects with public sector-private sector collaboration included in Industry 42 “Civil Engineering Works” in the Standard Industry Classification (2011), shall not exceed 22 percent of the public’s total indebtedness to the banking corporation;
5. Total indebtedness of the “construction, real estate, and manufacturing and
   trade of nonmetal construction materials” industry (Industry 11 in the list of industries appearing in the appendix to this directive), shall not exceed 26 percent of the public’s total indebtedness to the banking corporation.

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Appendix
List of Industries

1. Agriculture
2. Mining and quarrying
3. Machinery, electrical and electronic equipment
4. Metal and metal products
5. Rubber and plastics
6. Chemicals
7. Petroleum products
8. Pharmaceuticals
9. Food, beverages, and tobacco
10. Diamonds production and trade
11. Construction, real estate, and manufacturing and trade of nonmetal construction materials
12. Electricity—electricity, gas, steam, and air conditioning supply
13. Water—water supply, sewerage, waste management, and remediation activities
14. Commerce (excluding trade in diamonds and construction materials)
15. Hotels, hospitality and catering services
16. Transport and storage, postal and courier activities
17. Information and communication services
18. Financial and insurance services
19. Other business services
20. Public and communal services

Supervisor of Banks: Proper Conduct of Banking Business [28] (10/24) Industry Indebtedness Limitation Page 315- 6 ONLY THE HEBREW VERSION IS BINDING Updates Circular 06 number Version Details Date 1244 Original circular 9/3/86 1392 Update 22/1/89 1424 Update 6/7/89 --- 1 Insertion into Proper Conduct of Banking Business Directives 8/91 1532 2 Update 11/11/91 1583 3 Update 21/7/92 1610 4 Update 11/1/92 1761 4 Update (Appendix C) 27/3/95 1778 5 Update 22/10/95 1782 6 Update (Page 3) 7/11/95 --- 6 New version of Proper Conduct of Banking Business Directives file 12/95 1838 7 Update 20/11/96 1880 8 Update 3/8/97 1902 Freeze start 30/12/97 1919 9 Update 26/4/98 1972 10 Update 28/4/99 2068 11 Update 6/2/02 2094 12 Update (Appendix C) 15/12/02 2151 13 Update 13/12/04 2246 14 Update (Cancel Appendix C) 16/03/09 2249 15 Update 17/09/09 2259 16 Update 18/2/10 2277 17 Update 19/10/10 2357 18 Update 27/12/12

Supervisor of Banks: Proper Conduct of Banking Business [28] (10/24) Industry Indebtedness Limitation Page 315- 7 ONLY THE HEBREW VERSION IS BINDING 2385 19 Update 30/5/13 2482 20 Update 22/10/15 2515 21 Update 29/9/16 2534 22 Update 10/7/17 2600 23 Update 12/1/20 2628 24 Update 29/09/20 2649 25 Update 07/01/21 2669 26 Update 30/9/21 2690 27 Update 27/12/21 2803 28 Update 29/10/2024