In a joint letter to PM Irakli Garibashvili and Parliament Speaker Davit Usupashvili, the International Monetary Fund (IMF); European Bank for Reconstruction and Development (EBRD); Asian Development Bank (ADB), and the World Bank have called for keeping banking supervision inside the National Bank of Georgia (NBG).

The latter, dated with June 24, warns that the bill currently debated in the Parliament, envisaging stripping the NBG of supervisory functions of financial institutions and transferring them to a separate agency, would “threaten banking sector stability, and undermine prospects for sustained growth.”

The letter is signed by ADB’s Country Director in Georgia Kathie Julian; EBRD Director for Caucasus, Moldova and Belarus Bruno Balvanera; IMF mission chief Mark Griffiths, and World Bank’s Regional Director for the South Caucasus Henry Kerali.

Below is the full text of the letter:

“We are addressing you to express our deep concerns about the recently proposed draft amendments to the Organic Law on the National Bank of Georgia (NBG) that would remove banking supervision from the NBG and create a new banking supervision agency. We believe that enacting the amendments as tabled in parliament would weaken the independence and quality of banking supervision in Georgia, threaten banking sector stability, and undermine prospects for sustained growth. Our concerns are highlighted below.

In Georgia’s case, moving banking supervision out of the NBG does not seem prudent. While practice varies among countries, the tendency after the 2008-2009 global financial crisis has been to place banking supervision inside the central bank to strengthen linkages between monetary policy and financial stability. Such coordination is particularly important at this time, when the banking sector could come under strain from a slowing economic and Lari depreciation. Since Georgia is a small country, with only a limited number of financial sector professionals, having bank supervision inside the central bank has the added advantage of keeping specialized expertise under one institution, which contributes to efficiency and quality. For these reasons, in countries with similar stages of financial market development and similar capacity constraints, the IMF, the World Bank, the EBRD and the ADB would caution against moving banking supervision out of the central bank.

The arguments presented for removing banking supervision from the NBG do not seem convincing. The May-June 2014 IMF-WB Financial System Stability Assessment for Georgia assessed the NBG’s banking supervision positively. It noted significant progress in strengthening banking regulation and supervision, and praised the NBG for adopting an advanced risk-based supervisory regime and for effectively allocating supervisory resources.

The proposed governance structure of a new Banking Supervision Agency could result in inadequate independence. We are concerned by the proposal to give the Parliament the power to appoint Board members of the new Banking Supervision Agency. This would undermine the checks-and-balances principle embedded in the existing appointment procedures for the NBG Board (where the President nominates a candidate and Parliament has to approve) and instead lead to politicization of banking supervision. There is also the risk that a new agency might be too weak to resist lobbying by the banking sector for weaker regulation, which would threaten financial sector stability. Limited operational independence could undermine the supervisor’s capacity to mobilize already scarce expertise.

We are also concerned by the hasty manner in which the new draft law was tabled, without the consultation of key stakeholders or outside experts, and the uncertainty this has created. In 2015-2016, Georgian banks may need to raise capital to strengthen their balance sheets. Uncertainty created by legislative changes and upheaval of banking supervision could jeopardize investors’ trust and thus complicate this task. Banks would then have to deleverage, which would hurt credit and growth.

For these reasons, we cannot support the initial legislative proposal, as we believe it entails substantial risk to the independence and quality of supervision and to coordination with monetary policy. Our best advice is to keep banking supervision inside the NBG. However, if you are determined to move supervision out of the NBG, it will be crucial that your proposals address the concerns raised above, and that they would be in line with the Basel Core Principles for Effective Banking Supervision. Proposals should also show how operational independence of any new agency would be guaranteed, including arrangements for its budget and the appointment process for agency head(s); there should be an accountability framework for the new agency, together with a framework for avoiding conflict of interests, and appropriate legal protection for staff. The proposals should also ensure that the quality of supervision is not weakened during the transition to a new agency. Finally it would be important to consult the EU on any proposals, given the Association Agreement commitment to improving banking supervision and central bank legislation with EU and ECB support. 

We appreciate your personal involvement in this important matter and stand ready to work with you to find a solution that preserves the independence of banking supervision (and of the NBG) and ensures that its governance and operations are in line with international best practice.”