National Bank Supervisory Reforms (2017-2021)

     

     

    The goal of the supervisory reforms implemented by the National Bank in 2017-2021 is to promote the stable and efficient functioning of the financial system, to create a competitive environment while reducing risks. As evidenced from the reforms carried out, the rights of consumers and investors have been better protected, the financial stability and transparency of the financial sector have been significantly improved.

    The National Bank maintains a dynamic ongoing communication with market participants and stakeholders to foster the safe and smooth implementation of the reforms. The National Bank will continue to introduce international best practices and improve supervisory policies in the coming years.



    Supervisory reform encompasses the following areas:

    • Banking supervision
    • Non-banking supervision
    • Financial and Supervision Technologies (FinTechs)
    • Supervision of credit bureau
    • Supervision of capital market
    • Money laundering inspection and supervision

     

    Banking Supervision

     

    Amendments to the Laws

    • In December of 2017, the Parliament of Georgia approved a package of legislative amendments (on the Organic "Law on the National Bank of Georgia" and the "Law on the Activities of Commercial Banks"). 
      • Commercial bank’s board members are prohibited to carry out executive functions;
      • The property ownership rights, asset ownership and group structure restriction provision has been updated: the law is in line with the NBG’s decision to prohibit banks to have non-profile investments.
      • NBG is now authorized to regulate banking groups on a consolidated level;
      • The primary principle of risk-based supervision has been declared;
      • The procedural rules and requirements of licensing and purchasing significant shares of commercial banks have been updated;
    • In 2017, the Civil Code was amended: 
      • Upper limits for effective interest rates and penalties were established, which equal the annual effective interest rate of 100% and the annual rate of 150% respectively. In addition:
      • From 2018, amendments have been made to the Civil Code:upper limit for the annual effective interest rate has been defined as 50%. In addition, upper daily rate for penalties are defined as 0,27% and total penalties should not be higher than 1.5 of residual loan amount for past due loans.

     

    The National Bank of Georgia defined the annual effective interest rate and the financial costs, and approved a Regulation for the calculation of the effective interest rate. Along with other violations, it introduces special penalties for violations of the "Protection of Consumer Rights while Rendering Services by Financial Institutions".

    • During 2019, NBG has developed a comprehensive framework for bank recovery and resolution with the assistance of IMF technical experts. The National Bank of Georgia was entitled with additional power to perform the resolution of commercial banks . 



    Amendments to the Regulations 

     

    • In 2017, In line with Basel III framework, the Regulation on the disclosure requirements for commercial banks within Pillar 3 was approved and became effective, requiring commercial banks to publish qualitative and quantitative information regarding capital elements, risk weighted assets, remuneration of senior management and other material issues.
    • In 2017, NBG finalized formalizing  Pillar 2 elements based on Basel III capital adequacy framework. In addition, amednments have been made to the capital adequacy framework with the aim to improve the quality of regulatory capital of banks and achieve better compliance with Basel III framework and international standards:
      • The minimum capital requirements have been updated and they are: 4.5%, 6% and 8% for Common Equity Tier 1, Tier 1 and Total Regulatory Capital respectively.
      • Banks are now required to hold additional so-called Combined Buffer through Common Equity Tier 1, that consists of the conservation, the countercyclical and the systemic buffers.
      • Level of countercyclical buffer is discussed on quaterly Financial Stability Committee meetings.
      • Pillar 2 buffers were identified: non-hedged foreign currency credit risk buffer, credit portfolio concentration risk buffer, net stress tests, general risk assessment program (GRAPE) buffer | Press Release
      • A guideline to the General Risk Assessment Program (GRAPE) has been published | Press Release
      • NBG has increased minimum regulatory capital requirement for current commercial banks and legal entities seeking a banking license from 12 million Gel to 50 million GEL;
      • In 2017 the Regulation on Liquidity Coverage Ratio (LCR) was approved, in order to upgrade prudential supervisory process. LCR represents a modern and effective approach to short-term liquidity management (of up to 30 days) and provides a means to achieve improved identification, assessment, monitoring and control of risks.
      • These changes imply greater exposure limits for groups of connected counterparties from GEL 350,000 GEL to 2 million to be assigned to the retail exposure class that will allow banks to include loans given to micro, small and medium businesses in the retail class (which implies an easing of the supervisory burden on these types of loans).
      • The minimum requirements for loans were classified in the standard category distributed to individuals with Payment to Income (PTI) and Loan to Value (LTV) ratios. The above updates were meant  to improve lending standards in the banking sector.
      • In efforts to further promote responsible lending standards, limits were set for loans disbursed without income verification in 2018. The NBG set new maximum portfolio limit as 25% of regulatory capital for loans disbursed without income verification. Also, the NBG introduced maximum portfolio limit of 15% of regulatory capital for real-estate collateralized loans disbursed without income verification.
      • Since 2018 NBG has been practicing publication of draft legal acts related to supervision on its website. This effort aims to increase transparency of financial sector supervision.
      • In 2018, National Bank of Georgia approved the "Instructions on Real Estate Appraisal for Commercial Banks". Its main purpose is to improve the quality of real estate valuation in the banking sector and to ensure greater transparency of valuation principles and processes. The Instruction has been developed in accordance with the "International Valuation Standards" (IVS).
      • "Code of Ethics and Professional Standards for Commercial Banks" was adopted that imposes standards and principles of ethics and professional conduct for commercial banks. 
    • NBG approved the Regulation on Corporate Governance Code for Commercial Banks and Regulation on leverage ratio, which is in compliance with Basel Standards and EU directives.
    • NBG approved the "Regulation on the Concentration of Exposures and Large Exposures in Commercial Banks" that aims to promote stability and the sound functioning of commercial banks and the financial sector;
    • In 2019 cybersecurity requirements were introduced. The Regulation (and associated requirements) are largely based on the NIST standard (5 main functions) and cover the recovery and response process for incident management, among other topics.
    • In 2019, NBG in cooperation with the State Insurance Supervision Service, developed the draft law on supplementary prudential supervision of entities comprising the financial conglomerates. That implies requirements for capital adequacy, risk concentration, intra group transactions, internal control mechanisms and risk governance.
    • In 2019 NBG issued the Regulation on Net Stable Funding Ratio (NSFR), another liquidity/funding risk supervision tool under Basel III.
    • The National Bank published the Stress Test Methodology Manual, which aims to disclose to stakeholders the methodology for determining capital adequacy for commercial banks in times of stress, including the scenario used, the assumptions, and the approaches to each risk.
    • NBG has a full-fledged framework for the recovery and resolution of banks since January 2021, that will significantly contribute to the stability of the financial system.
    • The first supervisory strategy document was published by the National Bank in 2020. It includes the strategic priorities for 2020-2022 and the activities planned for implementation. The document promotes effective planning of the NBG functions and presents future vision for employees, while also increasing predictability of the sector for future events, providing access to information on supervisory priorities and plans for investors, international financial institutions and rating agencies, the public and other stakeholders.The NBG makes sure the supervision strategy document is updated on an annual basis, and is published in the first half of the year | Press Pelease
    • The reporting forms to be submitted to the National Bank were updated by 2020 to comply with IFRS, a new asset reserve regulation was drafted, and initial capital-related approaches were developed.
    • Amendments to the Law of Georgia on Competition and the Organic Law on the National Bank in 2020 gave the NBG a more explicit authority with regards to the implementation of competition policy. 2020 was an important year for the National Bank in terms of working on competition policies. In 2021, the NBG drafted and published two acts. These rules are based on international best practices | Press Release
    • In 2021, the National Bank modified the regulations to better reflect ESG issues. The amendments defined the responsibility of the Supervisory Board for integrating ESG issues into the Bank's strategy and risk management framework and for their effective implementation. The ESG Reporting and Disclosure Principles were developed by the NBG for guidance.
    • In 2021, the National Bank approved amendments to the Corporate Governance Code for Commercial Banks. The changes affected the requirements for independent members of the Supervisory Board and changes related to the bank's remuneration policy.
    • NBG is working on a framework of consolidated supervision. Nowadays banks report their regulatory capital on a standalone basis, based on local GAAP. They also publish consolidated IFRS statements.
    • NBG continues working on approximating its legislation and requirements on payment services to EU Directives and Regulations, that will facilitate the increased customer confidence and develop fintech areas while encouraging new types of payment system providers. 

     

    Non-Bank Supervision

     

    • In 2017 the Law on Microfinance Organizations was amended. Amendments improved regulatory framework, which, to some extent, tightened the regulative norms. Specifically, the amendments have tightened the registration requirements including capitalization (the minimum capital requirement increased from 250 000 to 1 million Georgian Lari). The general regulatory framework for the activities of microfinance organizations was advanced to include improved standards for consumer rights protection and financial reporting.

     

    • The definition of loan issuing entity was introduced (person/entity, which, solely or together with related parties, has disbursed more than 20 loans) and they will be subject to NBG’s supervision starting from January 2019.
       

     

    Amendments to the Regulations 

     

    • The regulatory framework for supervising microfinance organizations and other non-banking institutions largely developed in 2018.
    • In 2020 NBG adopted the Regulation on Issuing Loans to Individuals, that aims to promote the stable and sustainable functioning of the Georgian financial system and ensure responsible lending to individuals by lending entities.
    • In 2020 NBG formalized the framework of imposing and implementing fines for microfinance organizations, currency exchange bureaus and their adminsitrators.
    • Several legal acts are underway missioned to significantly imporve the regualtory framework for non-banking supervision.
    • During 2021, the National Bank was working to develop the regulatory framework for a newly regulated entity, the Micro Bank. The purpose of the legislative package is to create a new medium-size financial institution, with stable business model and high reputation in the financial sector, to promote lending to entrepreneurial and agricultural activities, to increase competition and to reduce interest rates on credit products.

     

     

    Financial and Supervisory Technologies (FinTechs)

     

    • In 2020 NBG adopted the Regulation on the Regulatory Laboratory (sandbox) with the aim to use a regulation laboratory to test a fast-growing innovative financial services and products created in technology market, promoting their development and market access at a lower cost | Press Release
    • In 2020 the Regulation on  Data-driven Statistical, AI, and Machine Learning Model Risk Management;was adopted, that defines the process of building and using models and its basic components | Press Release
    • NBG has set up a Financial Innovations Office that is an effective platform for the NBG to communicate with financial innovators. The office is designed for those who are involved, or intend to become involved, in the financial technology market and who may be affected by the NBG’s supervisory framework either directly or indirectly;
    • In 2020, the National Bank of Georgia developed and published the principles for licensing a digital bank in Georgia. By developing the digital bank model, the National Bank aims to promote the development of innovative business models | Press Release
    • NBG is actively working on Open banking issues. Commercial banks have deadline until March 31, 2021 to implement the requirements of the first stage of Open Banking. After the first stage is successfully implemented, it is planned to gradually expand the use of Open Banking | Press Release
    • The NBG is considering launching a publicly available Central Bank Digital Currency (CBDC) to leverage new technologies to enhance efficiencies of the payment system and financial inclusion. The CBDC is a direct liability of the central bank that can be used to settle payments, or as a store of value and will have the status of a legal tender. In this journey, NBG is inviting technology firms, Fintech companies, and interested financial institutions to join efforts to explore the frontiers of financial technology | Press Release

     

    Credit Bureau Supervision

     

    Amendments to the Laws and Regulations

     

    • In September 2018 NBG became the regulator of Credit Information Bureaus (CIB). Every organization willing to collect information about loans, has to register with NBG as a Credit Information Bureau. NBG set new standards to avoid fragmentation of loan data. After the enactment of the regulation, it is mandatory for NBG-regulated financial institutions to send all loan/credit information to CIB about clients with the total liability of less than GEL 3,000,000. It is the bureau’s duty to publish this data.
    • In 2020,  amendments were made tothe Regulation on "Providing Information, Registration and Access to Information in the Credit Information Bureau on the Territory of Georgia". The purpose of these amendments was to provide voluntary approval for verification of marketing offerings to the credit bureau and to clarify electronic consent requirements.

     

     

    Regulations Related to Capital Market Supervision

     

    In 2016, the Georgian Government and the National Bank of Georgia jointly developed the Georgian Capital Markets Development Strategy that has eventually become a platform of several important amendments in terms of securities market supervision. The capital market regulatory framework reform and its allignement to the IOSCO principles and pertinent EU Directives (as defined under the DCFTA agreement) was listed as one of the main pillars of the strategy. During 2018-2021 NBG, in cooperation with the government of Georgia, undertook substantial steps forward to accomplish "first generation reforms". These recent reforms facilitated the process of acquiring IOSCO membership. Consequently the National Bank Georgia achieved one of the most important milestones - became an Ordinary Member and thus the MMoU signatory of IOSCO in August 2021. 

     

    Amendments to the Laws

     

    • "The Law of Georgia on Securities Market" has been fundamentally updated:
      • Unregulated forex activities have become subject to NBG regulation since 2018; hence the obligation was imposed on so-called "forex companies" to obtain a brokerage company license and become supervised entities;
      • In 2020 "First generation reforms" of Securities Market legislation were implemented. The amendments to the "Law of Georgia on Securities Market" are aimed to address gaps in current regulatory framework and are based on EU directives and EU Transparency Directive.
    • The Law of Georgia on "Financial collateral arrangements, netting and derivatvies" was adopted in 2019. The law was developed based on the best international standards and ISDA recommendations.
    • "The Law of Georgia on Investment Funds" was adopted in 2020. The law is based on international principles and regulatory models, including the principles and provisions of UCITS Directive.

     


    Amendments to the Regulations

     

    In 2018-2021  NBG fundamentally renewed capital market regulatory framework and started implementation of supervisory program for capital market-regulated entities (investment firms, asset management companies, investment funds, registrar, public issuers, GCSD/GSE)

     

    Investment Firms (Brokerage Companies)

     

    • In July 2018, licensing and regulatory framework for brokerage companies was updated reflecting related principles of Directive 2014/65/EU on Markets in Financial Instruments (MIFID II). Main changes:
      • Fit&proper criteria
      • Client asset handling 
    • Limits for brokers who act as counterpartiesof clients, disclosure requirements, etc.;
    • New monthly reporting framework for brokerage firms and commercial banks involved in brokerage activities was implemented in 2019; The reporting system allows NBG to monitor activities of brokerage firms, size and types of their client base and clients’ assets.
    • In December 2020, the Regulation on "Recognizing a Person as a sophisticated Investor" was adopted. The regulation further clarifies the Securities Market Law in terms of prerequisites that should be satisfied to recognize a person as a sophisticated investor.
    • Code of Ethics and Professional Conduct for Banking and Securities Market Participants was adopted in February 2021. 

     

    Investment Funds and Pension Scheme (pillar II)

    • In November 2018, the Regulations under the "Law of Georgia on funded pensions" were adopted:
    • In September-November 2020, the regulations under the "Law of Georgia on Investment Funds" were adopted. The framework set by the regulations is in line with the applicable EU directives/regulations (AIFM, UCITS), also taking into account the level of market development. 

     

    Issuers 

     

    • In 2019-2020, the prospectus regulation (Procedure for  public offering of securities and filing of placement report) was modified to cover the main principles of EU Regulation 2017/1129. The prospectus regulation includes detailed guidelines and format for drawing up prospectus and hence, standardizes and simplifies the process of prospectus preparation and approval.  
    • In 2020, a MoU was signed with SARAS to enhance cooperation and coordinate actions in terms of public issuer supervision. In addition, a single reporting portal was integrated with SARAS, enabling public issuers of securities to fulfill NBG transparency and reporting requirements by submitting reports through the SARAS portal.
    • In October 2020, the Regulation on disclosure requirements in relation to the information about issuers and appointing registrar to the issuer was fundamentally modified to reflect most of the requirements set by the Directive 2004/109/EC of the European Parliament and of the Council on the harmonization of transparency requirements.
    • In October 2020, Regulation  on insider dealing, the unlawful disclosure of insider information and market manipulation was adopted; This regulation aims for significant improvement in transparency of issuers through publication of insider information. The provisions of the regulation applies to the market intermediaries as well.
    • In December 2021 the Corporate Governance Code for the Issuers of Public Securities was adopted; The Code reflects the international best practice. The aim of the Code is to encourage companies to demonstrate increased responsibility by ensuring active engagement with stakeholders, as well as by achieving greater transparency and higher level of investor rights protection. 


    Market Infrastructure (GSE/Registrars)

    • In September 2018, the securities register maintenance framework was modified and updated to standardize processes and set relevant requirements for securities registrars;
    • In February 2018, the procedure for granting the financial instruments trading system the status of organized market was adopted, reflecting general principles of MIFID II regulation. 

     

    Further Capital Market Legislative and Regulatory / Supervisory Amendments are Underway and Include the Following:

    • Legislative package regulating issuance of mortgage covered bonds and public supervision of commercial banks issuing such bonds; The package provides a foundation for the development of a mortgage bond market in Georgia;
    • Regulatory package under the draft "Law of Georgia on Dematerialized Securities" to include updated ownership regime of public securities, central securities depository licensing and regulatory framework, updated procedure for nominee ownership and register maintenance framework, as well as procedure for on accounting and custody of securities;
    • Amendments to the "Law of Georgia on Securities Market" with respect to activities that licensed brokerage companies are allowed to perform. The amendment aims to align the law with the best international practice, IOSCO principles and to the recommendations of European Union Securities and Markets Authority (ESMA). 

     

     

    Money Laundering Inspection and Supervision




    The risk-based AML supervision was a consequence of the gradual and progressive actions of the National Bank of Georgia. These Developments have significantly contributed to the effectiveness of the banking and non-banking supervisory process.

    • In 2017, risk-based supervision of payment service providers was adopted.
    • In 2017, a new on-site inspection methodology was developed with regard to securities registrars and brokerage firms. The methodology sets out risk-based supervision planning processes, types, topics of the inspection and other important issues.
    • In 2017, significant amendments were made to regulations on determining and imposition of monetary penalties prescribed for non-banking financial institutions, leading to increased effectiveness of the sanctions regime. In addition, Regulation on "Determining, Imposing and Executing Monetary Penalties against Payment Service Providers" has been approved.
    • In 2018, the NBG developed "Supervisory Framework of the National Bank of Georgia on Combating Money Laundering and Terrorism Financing". The document established the basic principles for managing risk-oriented supervisory process, which forms the basis for executing the AML/CFT supervisory powers of the NBG.
    • In 2018, the off-site supervision of currency exchange bureaus was adopted.
    • In 2018, NBG launched AML/CFT off-site supervisory software.  The software enables the NBG to collect and analyze information and to determine individual risk profiles of the supervised entities, as along with the risks related to the financial sector concerned. In addition, AML/CFT off-site supervisory software enables secure communication that promotes effectiveness of the communication process. The ability of the software to share the supervisory information and documents securely and promptly, ensures uninterrupted supervision process in the pandemic circumstances.
    • An offsite supervisory control tool ("follow-up" inspection) was implemented in order to ensure the correction of the deficiencies identified during the inspections. The follow-up inspections have contributed to an even more effective allocation of the resources.
    • Amendments were made to the Regulation on "Determining and Imposing Monetary Penalties against Commercial Banks" based on the best practices of the EU states. The amendments significantly increased the effectiveness of the sanctions regime. 

     

    The following guidelines were developed and updated during the 2019  year:

    • Guideline on Money Laundering and Terrorism Financing Risk Assessment
    • Guideline on Customer Due Diligence.
    • Guideline on Organizational and Group-wide Risk Assessment and Risk Management
    • Guideline on Identification and Verification of Beneficial Owners
    • Guideline on Correspondent Relations


    • The off-site supervision of loan issuing entities was introduced.
    • The Regulation on Examination of Client's Ownership and Control Structure and the Identification and Verification of Beneficial Owner of Client entered into force the same year.
    • The official website of the NBG now features the information on the sanctions imposed by the NBG on the representatives of the financial sector for violations of the anti-money laundering and terrorist financing requirements.
    • the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) approved the Fifth Round Evaluation Report of Georgia in the same year. The report underscores the progress of supervisory approaches employed by the National Bank of Georgia (NBG) in achieving outcomes that are fundamental for proper AML/CFT system in the financial sector. The report also pinpoints that the level of compliance of the financial institutions has been improved since the previous visit (2011) | in detail
    • The commercial banks operating in Georgia are obliged to provide completed Compliance Control System Supervision Questionnaires for the Commercial Banks, starting from 2021. This way supervisors can evaluate the compliance through off-site tools, in accordance with the Georgian legislation, together with legal acts/guidance notes issued by the NBG and the international best practices.
    • Based on the best practices of the EU states, amendments were made in regulations on determining and imposing monetary penalties prescribed for the non-banking sector. The amendments significantly contributed to the increased effectiveness of the sanctions regime.
    • The rule on Electronic Customer Due Diligence was developed in 2021.
    • The documents developed during the 2021 year:
      • Guidance on the Red Flags of Money Laundering and Terrorist Financing
      • Guidance on Money Laundering and Terrorist Financing Typologies