Pillar 2 Buffers


    The macroprudential policy instruments of the NBG also include additional capital buffers. The National Bank of Georgia reviews the arrangements, strategies, processes and mechanisms implemented by the commercial banks and evaluate the risks of commercial banks according to the “Rule on General Risk Assessment Program for Commercial Banks”. As a response to the risks identified through the supervisory review and evaluation, the National Bank of Georgia sets the additional capital requirements, which is determined under the “Rule on Additional Capital Buffer Requirements for Commercial Banks” within Pillar 2. Pillar 2 requirements include the following buffers: Currency induced credit risk buffer, concentration risk; credit risk adjustment buffer, the net stress test buffer, which is based on supervisory stress-test results; and the net GRAPE buffer, which is determined by the National Bank of Georgia through a supervisory process called the General Risk Assessment Program (GRAPE). 


    The Concentration Risk Buffer

     

    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

     

    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 Buffer 

     

    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%.

    The Credit Risk Adjustment Buffer


    From January 1, 2023, Georgian banking sector has transmitted to the International Financial Reporting Standards (IFRS). According to the stated principle of the National Bank of Georgia, when transitioning to IFRS, other things being equal, a neutral approach to the cost of regulatory capital has maintained. The capital adequacy framework has been amended for this purpose. A credit risk adjustment (CRA) buffer and a procedure for its calculation were added to the Regulation on Determining Capital Buffers for Commercial Banks within Pillar 2. The purpose of establishing a credit risk adjustment buffer is to reduce the credit risk caused by insufficient expected credit losses set up for assets, and to determine an adequate capital buffer.


    General Risk Assessment Program

     

    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.

     

    Capital Pillar 2 Requirements

    From 2023, figures are IFRS-based

    CET1 Pillar 2 Requirement
    2023
    I Q.
    II Q.
    III Q.
    IV Q.
    Consolidated
    4.08%
    4.16%
    Interval
    3.09%-13.03%
    3.04%-12.2%
    Tier 1 Pillar 2 Requirement
    2023
    I Q.
    II Q.
    III Q.
    IV Q.
    Consolidated
    4.93%
    5.02%
    Interval
    4.03% - 15.57%
    3.99%-14.42%
    Regulatory capital Pillar 2 Requirement
    2023
    I Q.
    II Q.
    III Q.
    IV Q.
    Consolidated
    6.99%
    7.10%
    Interval
    4.81% - 18.91%
    4.95%-17.73%