From now on: a dedicated license to provide guarantees in Israel

Backdrop: opening of the guarantee market to nonbank entities

The guarantee market in Israel is expected to open up to additional nonbank players thanks to a reform designed to increase competition and expand financing options in the economy. In addition to opening the market, the reform is designed to ensure that entities providing guarantees will be able to fulfill their obligations even in a scenario of massive exercises of guarantees.

The legislative amendments included in the 2026 Economic Plan Law prescribe provisions that remove barriers to nonbank entities’ entry into the guarantee market with the objective of increasing competition. As a result, the Capital Market, Insurance and Savings Authority published a proposed policy for regulating the guarantee market, which includes a dedicated licensing track and stringent requirements relating to capital adequacy, liquidity, risk management and corporate governance.

The Authority emphasizes that, unlike other credit activities, when it comes to guarantees, the main risks are not limited to the borrower’s repayment capacity, but also include the guarantor’s capacity to fulfill its obligations to beneficiaries of guarantees when guarantees are exercised. Considering that at issue are off-balance-sheet exposures to potential sudden, massive exercises of guarantees and harm to third parties relying on the guarantees, the Authority formulated a policy addressing the need for a regulatory and supervisory framework for the guarantee market.

Dedicated licensing track and prerequisites

The draft update to the licensing procedure prescribes a designated licensing track in the guarantee market for the first time, and defines the prerequisites and documents that license applicants must submit. Inter alia, license applicants are obligated to submit a comprehensive document elaborating on their business activities, including a detailed business plan, classification of the types of guarantees that they intend to issue, segmentation of their target audiences and beneficiaries of the guarantees, and the average and maximum lifespans of the guarantees.

In relation to corporate governance aspects, license applicants are obligated to maintain complete separation between the marketing, sales and client acquisition systems and the underwriting, credit approval and operational functions in order to ensure that underwriting processes are performed without any hierarchical dependence on the sales system or any consideration of business objectives. License applicants are also obligated to implement a defined hierarchy of authorities for approving and issuing guarantees and a control mechanism requiring approvals by two authorized signatories for every guarantee to be issued, for any change in conditions and for every extension of validity.

Equity and liquidity requirements as of the first shekel

The financial requirements will apply as of the first shekel of the guarantee provided. Every entity will be obligated to maintain minimum equity of ILS 2 million, which increases in direct proportion to the volume of the company’s exposure, calculated at about 6% of the risk assets.

Entities will also be obligated to maintain a liquidity cushion according to an internal liquidity model that also takes stress scenarios into account, to disclose their binding agreements or summaries of terms with banking corporations or institutional entities for the provision of lines of credit and immediate liquidity in the event of a massive guarantee exercise event and to maintain an ECL (expected credit loss) provision model in respect of guarantees issued, according to the guaranteed party’s internal risk rating.

Risk management and board involvement

License applicants are obligated to formulate an orderly policy for underwriting, collateral management and for performing stress scenarios, and to define rigid exposure limits – to a single borrower, to a group of related borrowers, to high-risk economic sectors and to geographic and product dispersion. Applicants will also be obligated to review their stress scenarios at least once every six months and to actively integrate the results in their risk limits and risk appetite.

The board of directors (or a delegated board committee) will be obligated to approve the risk management policy document and the capital adequacy and liquidity document at least annually and to appoint an independent risk manager at officer level. These obligations transfer responsibilities for risk management from the professional echelon to the senior management echelon.

Guarantees pursuant to the Sale (Apartments) Law – additional prerequisites

Entities looking to provide guarantees by virtue of the Sale (Apartments) (Assuring Apartment-Buyers’ Investments) Law of 1974 will be obligated to fulfill additional prerequisites, including: methodologies for monitoring developer failure risks, construction and engineering risks and real-estate market risks; dedicated stress tests for the construction and real estate sectors; and a reinsurance plan that includes a self-risk threshold and a defined indemnity mechanism.

Entities will also be obligated to implement a closed construction loan procedure, including a separate construction loan account for each project into which all project cash flows will be deposited, and a mechanism for releasing tranches of credit that is contingent upon the receipt of engineering inspection reports confirming the pace of progress in construction and prior approval by the credit committee.

Practical significance: business opportunities with a high entry barrier

For nonbank credit-providers, fintech companies and other entities looking to enter the guarantee market, at issue are significant business opportunities with a high regulatory entry barrier in the form of capital adequacy and liquidity requirements and corporate governance obligations, which require advance preparations, in terms of both corporate structure and financial and operational infrastructure.

The Capital Market Authority clarifies that this is merely the first stage, and that it intends to continue expanding the regulatory framework in the guarantee market according to the development of the market and the experience amassed from implementing the reform’s directives, including through additional specific reporting and supervisory requirements. We recommend that relevant entities already begin examining their activities’ compatibility with the proposed requirements and consider participating in the discussions of the comments.

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Adv. Efrat Cohen is a senior partner and heads our firm’s Regulation Department.

Adv. Avihai Tal is an associate in our firm’s Regulation Department.

Barnea Jaffa Lande’s Regulation Department advises financial institutions and regulated financial service-providers in relation to licensing procedures and preparing for regulatory amendments, including examining their implications for entities’ operations, corporate governance structures and applicable compliance requirements.