Georgia: strengthening financial sector supervision 

Nowadays Georgia is a country with a relatively well-developed financial sector legislative framework and conservative regulations. Substantial assistance to develop and implement these laws and regulations was provided by international donors during the period of 1995-2006.

In 2008 Georgian Financial Supervisory Agency (GFSA, the supervisor of the whole financial sector- commercial banks, microfinance institutions, credit unions, foreign exchange bureaus, money transfer entities, insurance companies and the securities market) applied to the FIRST Initiative for technical assistance to strengthen supervisory capacity by assisting the GFSA in eliminating a regulatory gap, which was identified during the FSAP update in 2006. The project was designed to assist the GFSA through: a) the development of supervisory criteria for banks’ investments or acquisitions; and b) the development of an assessment methodology and introduction of capital requirements to account for the interest risk in the banks’ banking books and the interest and equity risks in the banks’ trading books. In December 2009, during the project implementation, the Parliament of Georgia has changed the financial sector legislation – the supervisory function over entire financial sector was transferred to the National Bank and the GFSA was abolished, however, this did not affect the project.

The project has basically achieved its goals: criteria for supervisory assessment of banks’ investment and acquisition have been developed and recommendations for corresponding legislative changes were made. More preciously, commercial banks must obtain the permission of the NBG for investments which defines the permissible activities in which the investment may be engaged. In consideration whether to grant permission, NBG will take into account the size and nature of proposed investment, risks arising from investment, etc.

Draft regulation on interest rate risk in banking books, as well as the guidance note on interest rate and equity risks in banks’ trading books were developed.  Interest rate risk methodology was developed taking into account local environment- high level of dollarization. According to project expert’s recommendations interest rate originated from internal and external markets are treated separately. NBG has conducted impact studies for various Georgian Banks.  Since most Georgian banks hold small share of traded assets, it is more rationale to formulate a relatively simple trading book regime. Under FIRST project guidance was completed on interest rate risk in trading book.

As a result of this project the National Bank of Georgia has in place a more robust and proportionate approach to banks’ acquisitions and investments, allowing the NBG to focus on those investments that pose the greatest risks to regulatory objectives. Furthermore, the NBG has a clearer view of banks’ interest rate risks and tools to address excessive interest rate risks, and is capable of close monitoring of banks’ trading books, with the ability to introduce specific regulatory requirements as and when these are required.

“National Bank of Georgia is grateful to the FIRST Initiative for the project which was timely and most helpful for us. We have no remarks on project processing as everything was exceptional, FIRST demonstrated very little bureaucracy and a lot of flexibility and support”. Otar Nadaraia, Deputy Governor, National Bank of Georgia