Pledging Assets of a Banking Corporation

Supervisor of Banks: Proper Conduct of Banking Business [6] (06/21) Pledging Assets of a Banking Corporation Page 336- 1 ONLY THE HEBREW VERSION IS BINDING PLEDGING ASSETS OF A BANKING CORPORATION Introduction

1. Various reforms in global regulation that have been implemented due to the global financial
   crisis have led to a marked increase in activity secured by various types of pledges, such as the increase in central clearing house transactions, the shift to central clearing of derivatives, as well as requirements for depositing collaterals—initial and variation—in respect of non￾centrally cleared derivatives.
2. Due to the growth in the scope and range of activities in respect of which banking corporations
   are required to pledge assets (by law, regulation, or market practice), it was decided not to establish a quantitative regulatory limitation on pledging a banking corporation’s assets. Nonetheless, this Directive defines requirements for sound management of pledging assets.
3. Sound management of pledging assets is very important in view of the ramification of pledging
   a banking corporation’s assets on the amount of assets available for paying to creditors in bankruptcy proceedings, and in view of the potential ramifications of pledged assets on the ongoing management of the banking corporation—for example, on the availability of liquid assets or the availability of collaterals to deposit and on the pricing of unsecured debts. Application
4. This Directive applies to a banking corporation, except for a foreign bank and a joint services
   company.
5. Definitions
   “Pledged assets”—As defined in the beginning of Section 61a(d)(1) in the chapter on “Pillar 3 Disclosure Requirements and Additional Information on Risks” of the Reporting to the Public Directives, and including assets securing central bank facilities. “Assets securing central bank facilities”—As defined in Section 61a(d)(3) in the chapter on “Pillar 3 Disclosure Requirements and Additional Information on Risks” of the Reporting to the Public Directives. Policy, Corporate Governance, and Control with regard to Pledged Assets
6. A banking corporation is required to maintain an appropriate balance between the need to
   manage its business and the need to protect depositors’ rights in a bankruptcy. Therefore, a banking corporation shall not pledge its assets unless it is required by law, regulation or the requirements of the relevant market in such a manner that without pledging the assets, it will not be able to carry out the activity or will not be able to carry it out under reasonable market conditions. In addition, the banking corporation must verify that the level of pledged assets does not significantly reduce its ability to raise additional funding sources, including in various stress scenarios.
7. Subject to the provisions of Section 6 above, the banking corporation shall act as follows:

Supervisor of Banks: Proper Conduct of Banking Business [6] (06/21) Pledging Assets of a Banking Corporation Page 336- 2 ONLY THE HEBREW VERSION IS BINDING (a) The banking corporation’s board of directors will outline the strategy regarding pledged assets and shall approve the policy established by management on the issue (hereinafter, “the policy”). (b) The banking corporation’s management shall formulate the policy in accordance with the strategy established by the board of directors and shall be responsible for its implementation. (c) The Risk Management function shall verify that the risks incorporated in pledged assets are taken into account, including the impact on liquidity and funding risk and on the legal and operational risks. As part of this, the requirements in Proper Conduct of Banking Business Directives, such as Proper Conduct of Banking Business Directive no. 342 (“Liquidity Risk Management”) and Proper Conduct of Banking Business Directive no. 350 (“Operational Risk Management”), shall be taken into account. (d) The Internal Audit shall examine the implementation of the policy in accordance with Proper Conduct of Banking Business Directive no. 307 (“Internal Audit Function”).
8. The policy shall refer to at least the following aspects:
(a) The activity and transactions for which it is permitted to pledge the banking corporation’s assets and the reasons for pledging the assets, such as activity in a clearing house, non-centrally cleared derivatives, etc. (b) The assets eligible for pledging, by relevant segments, such as activities, products, counterparties, etc. (c) The mechanisms of calculating the requirements for pledged assets and who determines them, based on categories of products, activities, and counterparties. (d) Internal limitations on pledged assets. The internal limitations shall be established at an overall level as well as in relevant segments, (e) Authorities for creating a pledge of the banking corporation’s assets.
9. The banking corporation shall establish and operate controls over pledged assets. Those shall
include, among other things, managerial information systems on pledged assets. The information systems have to provide segmented and timely administrative information in line with the level of pledged assets at the banking corporation and with the characteristic of the activity that underlies the pledged assets; such as assets securing transactions with central bank as opposed to assets pledged for another reason, methods for calculating the pledged assets, and etc. In addition, the information systems shall enable the banking corporation to control compliance with its policy in the issue.
10. The banking corporation shall examine various scenarios in order to estimate the requirements
for additional pledged assets (for example, due to changes in market conditions or due to a rating downgrade).
11. A banking corporation that heads a banking group shall formulate group policy on the issue and
shall set monitoring and reporting requirements on pledged assets at a consolidated level.

Supervisor of Banks: Proper Conduct of Banking Business [6] (06/21) Pledging Assets of a Banking Corporation Page 336- 3 ONLY THE HEBREW VERSION IS BINDING Miscellaneous
12. This Directive shall go into effect on January 1, 2022.
(a) A banking corporation that deviates or is liable, with a high probability, to deviate from the limitation during the period between the publication of this Directive and December 31, 2021, shall contact the Banking Supervision Department in writing. In its announcement, the banking corporation is to detail the reason for the deviation and the compensating mechanisms it is adopting, mechanisms taken from the Directive that will go into effect on January 1, 2022. (b) A banking corporation that finds it difficult to implement the Directive, in whole or in
part, on the date it goes into effect, shall contact the Banking Supervision Department.
(c) With the entry into force of this Directive, the quantitative limitations on pledges are cancelled, including that which is established in a letter by the Deputy Supervisor of Banks dated April 15, 2007, on the issue of “The pledge limitation on banking corporations’ repo transactions” (d6615111).

Updates
Circular 06 no. Version Details Date
1579 1 Original circular June 14, 1992
1679 2 Update January 1, 1994
---- 3 New version of Proper Conduct of
Banking Business file
December 1995
2270 4 Update June 27, 2010
2277 5 Update October 19, 2010
2661 6 Update—includes changing the name of the Directive June 15, 2021