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With Reuters

The Bank of Israel's Supervisor of Banks has published his official decision on provision for doubtful debts by Israel's commercial banks.

Israeli banks will be required to set aside reserves for 0.15% of their risk-rated assets, 1% of their debts under special provision and 2.5% of doubtful debts, all as of June 30 this year, Supervisor of Banks Yitzhak Tal ruled.

The new regulations are to be applied to the banks' financial reports for the third and fourth quarters of 2001. The banks estimate that the extra provisions will cost them around NIS 1 billion.

The regulations replace former procedures, in which banks were given freer rein to decide how much they should set aside for doubtful debts.

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The banks had strenuously objected to a draft proposal Tal circulated. The bank chiefs lobbied the finance minister and anybody who might quash the proposed directive, which threatens to abolish their profits, dividends and managerial bonuses for the third and fourth quarters of the year. But Supervisor Yitzhak Tal remained firm that the banks' provisions failed to reflect the true sorry state of the economy, and of their potential credit risk.

A draft proposal for the order released in late August sparked protests at the banks and played havoc with Israeli markets. Investors feared the new provisions would erode the banks' net profits.

Banks that last year set aside larger sums for doubtful debts than required may apply for a reduction in their provision.

Tal stated that he may consider changing or even cancelling the new rules starting from the end of 2003 if there is a decline in credit risk by then.

Israel's economy is expected to grow by around 1% this year, following a 6% surge in 2000, largely due to a U.S. economic slowdown and an 11-month-old Palestinian uprising.