Revolution in Banking-and-Finance Sphere, or What is in Store for the National Bank

FROM THE REDACTION

In the government’s portfolio of structural reorganization and regulatory reforms there appeared a new interesting and revolutionary project – the government, under Kakha Bendukidze’s proposal, has taken a decision to unite the state securities regulator, state insurance supervision, and, what is most important, deprive the National Bank of the right to supervise over other banks, and form a single mega-financial regulator.

This will weaken the National Bank’s positions whose main task is, in accordance with the law on it (Article 2), elaboration and implementation of monetary-credit and currency policy; supervision over the activities of commercial banks, non-bank deposit institutions, and currency exchange points, their licensing, regulation and control; securing of liquidity of financial-credit system, solvency and sustainable functioning based on market relations. After it is deprived of all this, it will only have the functions of implementation of monetary policy and international cooperation. As it can be seen, there is a struggle against Gotsiridze in his team with the purpose of weakening of his positions. The offend was also caused by the fact that money legalization monitoring service has senselessly toughened the demands in the National Bank as well, and demands that the banks should give information on inter-bank credits, once placed sums, and transfers after notification, etc. Because of this violation the National Bank has fined many banks for considerable sums, which caused irritation of the banks. According to a reliable source, the President does not like it that we are more Catholics than the Pope, and have a stricter legislation than in Baltic and many European countries. This, to a certain extent, caused capital outflow and redirection of money flows that used to come to our country. In view of this fact it was decided to withdraw Article 59 from the law on the National Bank, and, in accordance with Bendukidze’s project, it will never be able to control commercial banks. This will be done by mega-regulator. But who will control this mega-regulator? If it is under the government, it will be interfere with banks’ commercial activities, and there will be total chaos. If it is under the legislative body, it will be a determinant of the monetary policy, and, to a certain extent, an executor. Anyway, there will be chaos. As to independence of the National Bank in our country, it can be said by the example of other regulators, that it is fiction. Over the past years, the IMF has for the first time expressed its claims to the National Bank during the last mission. They do not want to dismiss Gotsiridze, but it is beyond doubt that they will weaken the bank’s positions. At the same time, according to our information, a consulting firm, that traditionally works with foreigners and on their request draws up projects of reorganization of various institutions, was involved in this matter. And, besides Bendukidze, another influential financier is lobbying this matter.
Anyway, the confrontation between the government – Bendukidze and the National Bank has reached its climax. It started with leaving of money for increasing the authorized capital, and is likely to finish with reorganization and weakening of the National Bank.
What will Bendukidze’s new portfolio will bring – no one knows it as yet. It is not known either whether Gotsiridze will be able to convince the members of its team and save this only solid sphere. The year 2006 will be decisive in this war. The US could not take a similar step since it is a very delicate sphere, but other experience exists in the world as well:
In the USA, control and regulation in the banking sphere is divided between three departments: Federal Reserve System (FED), Federal Deposit Insurance Corporation (FDIC), and OCC. This structure was historically formed in the beginning of the 20th century under the influence of reformation and consequent crises. At the same time, in this country there exists a serious body – SEC for controlling the securities market.
In England supervisory functions over banks are concentrated not in the central but in independent agency – FSA. This is an independent service and does not subordinate to the central bank. In this country too, this system was formed evolutionally. At first England’s central bank had no right to interfere with inter-bank credit market, and establish the bank credit rate, which is the main mechanism of inflation control, and regulation of bank-finance market in general, but it had the right to control banks, that is why progress necessitated that the central bank was given back this function and deprived of control over banks.
In Switzerland the banking system is controlled not by the central bank but a bank commission which is an independent regulator.
An independent agency like in England exists in Japan as well.
Kazakhstan and Baltic countries have also adopted this model.
In Europe setting of points at issue is central banks’ priority.
In Russia they work at this issue as well and created a structure similar to FSA, but the banking system is not attached to it.
But our project is something new, and it remains to be seen whether this reform is worth envying, especially taking into account the fact that presently, in spite of the problems, the supervisory service in the National Bank is absolutely organized, effective, and controllable. It is not clear to dismantle the old mechanism and create another one. This may have an inverse effect. Implementation of this project will probably be effective by 2010, when the basis and necessary conditions will be prepared.