IMF Country Report on Israel, April 2012: 

“Israel’s economy remains strong with GDP growing 4.7 percent in 2011, led by robust private consumption and buoyant investment. However, the global downturn is slowing Israeli growth, with 2012 GDP growth expected at 2.8 percent.

“Israel’s fundamentals are strong: inflation and inflation expectations are squarely within the 1-3 percent target range; unemployment is at historic lows; the net international investment position is a surplus; and public debt has fallen steadily to below 75 percent of GDP.

“These strengths are also underpinned by Israel’s sound institutional frameworks, including fiscal rules and a new central bank law. Furthermore, following recent discoveries of natural gas fields, Israel may become a net energy exporter in coming years…

“Following a mild recession in early 2009, output started recovering in mid-2009 and continued to grow strongly through the first part of 2011. Unemployment fell to comparatively low levels [5.6%], inflationary pressures became apparent, house prices increased rapidly (more than 40% in real terms since 2008), and strong capital inflows continued even during periods of heightened regional tension….

“The general robustness of the system was demonstrated in the 2002 and 2009 recessions. Risk factors relating to high public debt and continent pension liabilities have diminished in relative importance…

“The Israeli financial system currently appears to be generally robust, but faces an unusually uncertain and dangerous global economic environment. While Israel’s direct exposure to the most vulnerable countries is minor, there is a clear risk of a recession in Israel’s main trading partners in Europe and the United States, heightened risk aversion in financial markets, and difficult funding conditions. Moreover, Israel lives with persistent regional geopolitical risks, which would have economic repercussions if realized. Stability analysis suggests that systemic financial vulnerabilities to severe shocks in line with historical experience are manageable; in aggregate, buffers (including those in the household sector) are at comparatively comfortable levels…

“A variety of stress tests for banks, insurance companies, and long-term savings funds were undertaken. The calibration of these tests was demanding, but only a few individual institutions were projected to suffer major losses or to become relatively short of liquidity. The authorities already operate an effective, pro-active, and sophisticated system of financial sector oversight, which, however, needs to be developed further in some areas. The level of observance of the main international financial supervisory standards was assessed to be high…

“The current combination of external threats and the relative stability of the domestic system are propitious for strengthening the crisis management framework…. The global crisis affected Israel’s economy, but no domestic financial institution got into serious difficulties during the crisis. Banks weathered the storm of the global crisis, although profitability suffered. In part, the relatively robust performance was due to the short-lived recession and the characteristics of Israel’s banking system, namely, banks’ conservative management; reliance on deposit funding and the small interbank and wholesale funding markets; lack of complex asset and securitized markets; and strong and intrusive bank supervision…