Georgia: Financial Sector Assessment Program-Stress Testing the Banking Sector-Technical Note
IMF Staff Country Reports, January 8, 2015
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- Published: January 8, 2015
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781498306591.002
Sector assessment and key vulnerabilities
- The Georgian banking sector is sound and stable and has continued to perform well, but faces a number of key risks and vulnerabilities that need to be closely monitored.
- Principal vulnerabilities:
- Credit and funding risks related to dollarization.
- Concentration in the banking sector.
- Reliance on nonresident deposits.
- Nonperforming loans (NPLs) are gradually declining from their peak in 2009, but credit growth is above its long-term sustainable trend.
- Market risks are very limited, and trading books do not exist.
- Credit portfolio concentration risks are limited: default by the largest three borrowers would require additional capital of GEL 50 million for five banks.
Dollarization-related risks and central bank constraints
- Two major dollarization-related problems:
- Most of the borrowers in U.S. dollars (USD) are unhedged, as their income and expenditures are in national currency (this is especially evident in case of households).
- The National Bank of Georgia (NBG) has limited ability to provide liquidity support in USD and other foreign currencies.
- The NBG is implementing macroprudential measures to make FX lending more expensive for banks; for example, current risk weights for FX loans are topped at 175 percent.
- Uncertainty due to non-linearity of shocks related to lari depreciation warrants continuation of build-up of capital buffers as long as FX denominated loans constitute substantial share of banks’ loan portfolios.
Stress testing results and capital adequacy
- Separate stress tests performed by the NBG and by the FSAP mission show that the banking system as a whole is able to withstand severe shocks, given that most banks maintain healthy capital buffers well above regulatory minimum.
- Tests covered scenarios ranging from slow growth to severe macroeconomic shocks.
- Results indicate that major banks would generally remain adequately capitalized, taking into account current profits and introduction of Basel II.
- In adverse scenarios, recapitalization needs are manageable in terms of GDP: 1.6 percent for the worst-case scenario.
- Some banks are particularly vulnerable and need to strengthen their capital buffers; these banks exceed the minimum capital requirement by only a few percentage points (p.p.), which limits their loss-absorption capacity.
- High levels of profitability and solid net interest margins would decline during crisis periods, reducing net interest and other income.
Funding risks and recommended mitigation
- Funding risks stem from concentration and reliance on nonresident deposits.
- Policy actions to reduce vulnerabilities:
- Further diversification of funding sources.
- De-dollarization to reduce FX-related credit and liquidity risks.
- Introduction of Individual Capital Guidance, especially for the weakest banks, to avoid deterioration of loss-absorption capacity.
Operational and supervisory implications
- Continued build-up of capital buffers is warranted while FX-denominated loans remain a substantial share of loan portfolios.
- Enhanced monitoring of banks that are only marginally above minimum capital requirements is necessary.
- Macroprudential measures that increase the cost of FX lending (e.g., risk weights topped at 175 percent) are being applied to constrain FX lending growth.
International Monetary Fund. Georgia: Financial Sector Assessment Program-Stress Testing the Banking Sector-Technical Note (IMF Staff Country Reports 2015, 007).