The capital requirements for the Georgian banking sector are based on the Basel III standard, Regulation 575/2013 of 26 June 2013 and Directive 2013/36/EU of the European Parliament and of the Council (CRR-CRD package).

The minimum capital requirements are defined in the Regulations on Capital Adequacy Requirements for Commercial Banks, which says that, under Pillar 1, the minimum requirements are defined as follows:

• CET1 Capital Ratio 4.5%;
• Tier1 Capital Ratio  (CET 1 + AT1) 6%;
• Regulatory Capital Ratio (CET 1 +AT1+ Tier 2) 8%.
  
  

In addition to the Pillar 1 minimum capital requirements determined by the “Regulation on Capital Adequacy Requirements for Commercial Banks”, banks shall also observe additional capital buffer requirements for those risks that are not covered under Pillar I, including market and credit risks those are not covered under Pillar I, as well as concentration risk, interest rate, liquidity, strategic and reputational risks, etc. 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: 

• Non-hedged currency induced credit risk buffer (CICR);
• Loan Portfolio Concentration Risk Buffer (HHI), consisting of nominal concentration and sectoral concentration buffers;
• Net Stress Test Buffer - a buffer set on the basis of regulatory stress tests;
• Credit Risk Adjustment buffer (CRA), which is set due to the transition from the local GAAP to the International Financial Reporting Standards (IFRS). The purpose of establishing a CRA buffer is to reduce the credit risk caused by insufficient expected credit losses set up for assets, and to determine an adequate capital buffer.
• Net GRAPE Buffer - a buffer established by the National Bank of Georgia after reviewing: the risks under the general risk assessment program (GRAPE), and results of the bank's internal capital adequacy assessment process; The purpose of introducing net GRAPE buffer is to determine adequate capital buffers for the risks identified within GRAPE and not covered or inappropriately covered by the Pillar 2 capital buffers.

 

Additionally, commercial banks are required to have a combined capital buffer consisting of a capital conservation buffer (up to 2.5%), a countercyclical buffer (within 0-2.5%), and a systemic buffer.

• The purpose of the capital conservation buffer is to avoid operating close to the minimum requirements.
• The countercyclical buffer of capital is a key tool of macro-prudential policy. According to the Basel Committee recommendation, the Financial Stability Committee of the National Bank of Georgia revised the framework for setting countercyclical capital buffer. The revised framework implies setting positive cycle-neutral countercyclical capital buffer, thus a base rate for positive cycle-neutral countercyclical capital buffer is positive in normal periods as well. The base rate could be changed based on the macro-financial environment in which banks operate.
• The systemic bufferaims to increase the resilience of commercially important commercial banks whose financial difficulties may jeopardize the stability of the financial sector.
  
  

Under Pillar 3, commercial banks are subject to disclosure requirements which are meant to strengthen market discipline.