Harmonizing with international standards is one of the most important priorities of the National Bank of Georgia. Transition of commercial banks' supervisory reports to International Financial Reporting Standards (IFRS) was included in the 2020-2022 Supervisory Strategy. By adopting the IFRS, the public and supervisory reporting of the banking sector will be closer to the practices of other developed countries in Europe and the world. In 2020-2022, the National Bank of Georgia developed the concept and changes for the transition to IFRS. The Regulation on Identifying Risk Categories of Financial Instruments and Expected Credit Losses was approved, and changes were made to the relevant decrees, to come into force on January 1, 2023.

 

The Regulation on Identifying Risk Categories of Financial Instruments and Expected Credit Losses is based on IFRS 9 and specifies the approach that commercial banks should follow when using IFRS 9 in supervisory reporting. The introduction of the regulation will support the comparability of the approaches to calculating the expected credit losses on financial instruments of commercial banks, and help improve financial reporting. The National Bank of Georgia worked closely with commercial banks while working on the document, along with the bankers’ association, auditing firms and World Bank consultants.

 

Commercial banks are expected to comply with supervisory regulations with IFRS-based numbers and approaches as they transition to IFRS. Also, 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 should be maintained. The capital adequacy framework has been amended for this purpose. A credit risk adjustment (CRA) buffer and an updated 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.

 

Table: capital indicators of the banking sector according to the current approach and IFRS

Capital Adequacy	Calculated according to the current procedure		Calculated according to the IFRS
As of October 30, 2022	Capital indicator	Total capital requirement	Capital indicator	Total capital requirement	Including CRA buffer
CET 1 capital	15.0%	10.9%	17.7%	12.9%	2.1%
Tier 1 capital	17.0%	13.1%	19.6%	15.1%	2.1%
Regulatory capital	20.4%	16.7%	21.8%	18.7%	2.1%

 

Parallel reporting will be maintained along with the transition to IFRS, from January 1, 2023, until another decision is made by the National Bank of Georgia. During parallel reporting, commercial banks are obliged to compile supervisory reports both in accordance with the IFRS and in accordance with the Chart of Accounts for Georgian Banking Institutions and Instructions for Using the Chart of Accounts (the so-called local GAAP).

 

Technical amendments were introduced, as part of the transition to IFRS project, to the following regulations and provisions: Regulation on Approval of Asset Classification and Setting Up and Use of Loan Loss Reserves by Commercial Banks, Regulation on Lending to Individuals, Provision on Capital Adequacy Requirements for Commercial Banks, Regulation on Disclosure of Information by Commercial Banks within Pillar 3 and Provision on Managing Conflict of Interests.