Does Georgia’s Banking System Comply with European Standards?

FROM THE REDACTION

European Integration Forum (www.eiforum.ge) with the support of British Embassy in Georgia arranged a conference on ‘Correspondence of Georgian Banking System to European Challenges’ at Hotel Ambasadori on April 29.

Legislative package adopted by the parliament of Georgia has amended the Law on National Bank of Georgia. It implies changes in commercial banking supervision. Correspondence of Georgian banking system to international standards plays an important role in the process of Georgia’s integration into the EU. In June of 2004, The Basel Committee on Banking Supervision (BCBS) endorsed the new capital accord titled “International Convergence of Capital Measurements and Capital Standards: A Revised Framework” more popularly known as Basel II. It implies strengthening commercial banks own capital, creating joint competitive conditions while issuing credits and introducing new financial tools. Regulators in most jurisdictions around the world plan to implement the new Accord in some form or another by 2015. Georgian Banking system applies Basel I system. By 2009 Basel II system will partly begin to be implemented.
Georgian-European Policy and Legal Advice Centre (GEPLAC) Economic expert Dr. Merab Kakulia delivered a speech on the development of Georgian commercial banks. He discussed banking concentration. According to Dr. Kakulia, Georgian banking sector consists of 20 resident commercial banks and 2 foreign banks’ branches. 6 leading banks own 85% of total assets and 82% of deposits. The two leading banks are ‘Bank of Georgia’ and TBC Bank’ that owns 60% of assets and 56% of deposits. This indicates the high level of market concentration that actually limits competitiveness and forms a small circle of top banks. As for the rest of banks, except NBG, they have relatively small number of clients and limited deposit base. Despite the above mentioned, banks still operate, although not always successfully, by means of sufficient capital and several corporate clients. This time, foreign investors provide assistance to the banks. As a rule they take over controlling interests and try to strengthen their positions on market after re- branding. It’s worth noting that foreign capital that can be met at 14 commercial banks of the country plays an important role in the development of Georgian banking sector. In majority of cases foreigners own banks’ controlling interests. After taking over 60% of Bank Republic shares, a French giant, Societe Generale Group did not implement an aggressive policy on market, although it has restructured the bank and has offered several new products to customers. As a result, it has significantly improved positions on market. Other banks of Georgian commercial banking sector come from post Soviet Union states and they depend on their state’s government in some way or another – VTB Bank (Russia), Bank Turan Alen (Kazakhstan) International Bank of Azerbaijan (Azerbaijan) etc. It’s worth noting that majority of foreign banks operating in Georgia and owning controlling stakes of Georgian commercial banks are not famous on the world banking market. However, the same is not true about ProCredit Bank.
One of the characteristics of Georgian banking sector ownership is the high share of the international financial organizations such as EBRD and IFC. Therefore, despite foreign capital high total share, it’s still early to talk about large scale foreign currency in Georgian banking sector. Among 14 banks only a half is a subsidiary structure of more or less large foreign banks. State credit organizations are included in it as well. Total share of their assets is less than 20%, as for deposits, it is nearly 22%. This is a very low indicator while comparing with other EU states. Georgia’s banking sector is quite dynamic. Its assets have increased by 60% and deposits – by 55% over past three years. In 2007 Total assets were 43 % of GDP. In 2005 this indicator did not exceed 15%. According to forecasts, Georgia’s banking sector’s total assets will be 60% of GDP in 2009 and will equal to the Western European countries’ indicators. At this stage there is a real credit boom in the country that is accompanied by its negative processes. Credit boom in Georgia is characterized by high demand on long term credits. More than a half of long term loans are issued in the fields of construction, trade and industry. It is obvious, that long term crediting of construction supports the financing of import rather than development of production. Long term credits issued to individuals (physical persons with 1/3 of issued long term credits) have sharply increased over recent years. Banking sector’s growing assets on consumer market is related to important risks. The reason of it lies in low and unstable incomes of population. 20% of Long term credits are mortgage loans. Mortgage loan volume in 2007 increased with 50%, Gel 600 million in comparison with the previous year. It encouraged further development of housing construction. It’s worth noting that during this process housing prices’ growth rates was slowing down (although prices were not decreasing). The latter began in 2006. Housing market structure became active again in 2007. However, its sharp drop can not be excluded and it may lead to mortgage crisis. Another challenge of Georgian banks is a liquidity risk. Attempts are made to cover them by means of international financial institutions credit lines. In 2007 their volume increased by 127%, while deposits volume increased only by 55%. Irrelevance between assets and liabilities is not the subject of worry yet. However, existing liquidity crisis on global markets will make it difficult to attract credit resources from international organization. This will be negatively reflected on stability of Georgian banks. Representative of The Santander Bank, Boris Gutierrez Simora discussed Spain’s banking sector experience and added that while there are 17 autonomies, problems have not been yet caused in Spain. Still, it’s possible that they appear after 4-5 years. Spanish banking system was the subject to united system till now and was divided according to regions. For instance, there was a bank that served only central regions of Spain. Regional banks existed. The youngest Spanish bank is 100 years old. Together with the country’s development, banks began to operate in various regions and Spanish monetary system became non-regional. Following the formation of 17 autonomous regions, separate national banks appeared in Spain. It was a huge mistake. Three among these autonomies feel especially comfortable. They intended to form their own financial structure that is strictly prohibited by constitution. Catalonians would like to introduce their own regulator. Fortunately so far they are not able to make their wish come true.