The macroprudential policy instruments of the NBG also include additional capital buffers introduced within the Basel II framework: the capital buffer for credit portfolio concentration risk; the net stress test buffer, which is based on supervisory stress-test results; and the net GRAPE buffer, which is determined by the NBG through a supervisory process called the General Risk Assessment Program (GRAPE).
The capital buffer for sectoral and name concentration risk is used to reduce risks accumulated in a particular group or sector of borrowers. Unlike the countercyclical capital buffer, which affects the entire credit portfolio, the concentration risk buffer aims to identify and mitigate systemic risks arising from specific sectors/borrowers.
The concentration risk buffer is set individually for each commercial bank, depending on the share of specific sectors and borrowers in their portfolio.
The stress test buffer is one of the most important components of the Pillar 2 Framework, which aims to evaluate the capital adequacy of banks based on stress scenarios and macroeconomic risk factors. The stress scenarios change counter-cyclically, making the stress tests buffer an additional macroprudential instrument. In addition to macroeconomic parameters, these scenarios also include the distribution of shocks according to different economic sectors, which allows analysis of a borrower’s financial sustainability. The use of stress scenarios makes macroprudential policy more forward-looking, reduces the dependence on historical data and improves comparability among different banks. The stress test buffer is set individually for each commercial bank based on the results of supervisory stress tests.
The currency induced credit risk (CICR) buffer is a macroprudential buffer that aims to reduce systemic risks caused by dollarization. The introduction of this buffer emphasizes the intention of the National Bank of Georgia to gradually decrease dollarization in the banking system. Doing so will result in a more resilient banking system capable of withstanding external shocks. The currency induced credit risk buffer is created for risk positions that are denominated in a currency different from the currency used to cover those positions. To calculate the CICR buffer, credit risk positions caused by exchange rate fluctuations should be multiplied by the risk weight and then by the minimum requirements for supervisory capital. In turn the risk weight requirements for the risk positions depend on the level of loan dollarization, If the dollarization is 40% or below the weight will be set at 40% and each 1 percentage point increase in dollarization will result in the rise of risk weight by 3 percentage points, up to 100%.
In the framework of the General Risk Assessment Program (GRAPE), banks might be required to hold additional capital to insure against those risks that are not covered or adequately captured in the other capital buffers within Pillar 2.