Georgia’s Got “Talent”... in Banking Supervision
04 July, 2015
Georgia’s Got “Talent”... in Banking Supervision
On June 27, Georgian Parliament approved the bill on separation of a banking supervision function from the National Bank in the first hearing. The move has met a lot of criticism from the President of Georgia and key international financial institutions operating in the country. They find the idea hasty and not in line with the current international trend. It also contradicts the terms of the Association Agreement between Georgia and EU, critics say. The president of Georgia plans to
veto the bill.

Four international institutions, including the World Bank, the International Monetary Fund, the European Bank for Reconstruction and Development, and the Asian Development Bank believe the bill may jeopardize rather than guarantee the check-and-balance policy.

The bill was intended to depoliticize the NBG governed by Giorgi Kadagidze, who is largely believed to have a close friendship with the former authorities. The point is that the recent depreciation of the Georgian national currency has triggered speculations of it being mostly caused by rigging the currency market rather than by economic factors. And the NBG has allegedly turned a blind eye.
In early June of 2015, to balance the “situation,” Tamaz Mechiauri, Deputy Head of the Parliament’s Finance and Budget Committee, submitted a bill amending the law on the National Bank of Georgia. The amendment aims to replace the financial supervision committee of the NBG by a separate regulatory body called Financial Supervision Agency. The FSA becomes operational as of July 1st of 2015 and remain under the National Bank’s control. The key change is that unlike the NBG board members [who are nominated by the President and approved by the Parliament] the board of the FSA will be nominated and appointed by the Parliament directly.

The arguments presented for removing banking supervision from the NBG do not seem convincing to the international institutions that assessed the NBG’s banking supervision positively.

However, four international institutions, including the World Bank, the International Monetary Fund, the European Bank for Reconstruction and Development, and the Asian Development Bank believe the bill may jeopardize rather than guarantee the check-and-balance policy. On June 24 they sent a joint letter to Prime Minister Irakli Garibashvili and Parliament Speaker Davit Usupashvili calling for leaving the banking supervision inside the NBG.
The letter warned that the bill, which by the time of its arrival was being debated in the Parliament, would “weaken the independence and quality of banking supervision in Georgia, threaten stability of the banking sector and undermine prospects for sustained growth.”
The letter also emphasizes that while the practice varies among countries, the tendency after the 2008-2009 global financial crisis has been to place banking supervision inside the central bank to strengthen linkages between monetary policy and financial stability. And “Since Georgia is a small country, with only a limited number of financial sector professionals, having bank supervision inside the National Bank has the added advantage of keeping specialized expertise under one institution, which contributes to efficiency and quality.”
The arguments presented for removing banking supervision from the NBG do not seem convincing to the international institutions that assessed the NBG’s banking supervision positively. They are concerned with the hasty manner in which the new draft law was composed, without consultations with key stakeholders or outside experts, and the uncertainty this has created. This may cause mistrust among investors. Authors of the letter also fear that the proposed governance structure of the new banking supervision agency could result in insufficient independence of the institution.

When a similar banking supervision act was passed in 2007-2009 and then abolished, nobody even noticed the change. The point is that Kadagidze was the head of this new supervisory service...

“This would undermine the checks­-and-­­balances principle embedded in the existing appointment procedures for the NBG Board (where the President nominates a candidate and Parliament has to approve) and instead lead to politicization of banking supervision. There is also the risk of a new agency being too weak to resist lobbying by the banking sector for weaker regulation, which would threaten the financial sector’s stability,” the letter reads.
However, if the Georgian government is really that determined to move supervision out of the NBG, international financial institutions find it crucial to setting it in line with the Base Core Principles for Effective Banking Supervision.
“It would be important to consult the EU on any proposals, given the Association Agreement’s commitment to improving banking supervision and central bank legislation with EU and ECB support,” the letter states. The letter is signed by ADB’s Country Director in Georgia Kathie Julian; EBRD Director for Caucasus, Moldova and Belarus Bruno Balvanera; IMF mission chief Mark Griffiths, and World Bank’s Regional Director for the South Caucasus Henry Kerali.
The bill frustrated the Georgian President as well. According to Giorgi Abashishvili, Advisor of the President of Georgia on economic issues, the bill contradicts the terms of the Association Agreement Georgia signed with the EU a year ago.
“This agreement obliges Georgia to make any changes related to the banking law only with expertise provided by the EU and with the inclusion of the European Central Bank,” he said.
More than that, he believes the bill may jeopardize the NBG’s ability to carry out its obligations envisaged by Georgia Constitution.
“We have repeatedly stated that the professional feasibility of this bill is absolutely unclear to us,” said Abashishvili on June 26, after the bill was approved at a parliamentary committee hearing. “Accordingly, any bill that may harm the economic development of the country and most importantly, its financial development, will be vetoed. In this case, such a bill will naturally face a veto.”
However, the practice also suggests that when a similar banking supervision act was passed in 2007-2009 and then abolished, nobody even noticed the change. The point is that Kadagidze was the head of this new supervisory service and when he was appointed governor of the NBG in February of 2009, he got service back inside the National Bank again. No international financial institutions expressed any concern or expressed any opinion whatsoever. Neither did they assess the relevance and the results of the previous change.

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