{
  "title": "Georgia: Financial Sector Assessment Program-Stress Testing the Banking Sector-Technical Note",
  "publication": "IMF Staff Country Reports, January 8, 2015",
  "sourceUrl": "https://www.imf.org/en/publications/cr/issues/2016/12/31/georgia-financial-sector-assessment-program-stress-testing-the-banking-sector-technical-note-42586",
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  "summary": "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.",
  "sections": [
    {
      "heading": "Sector assessment and key vulnerabilities",
      "content": "- 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.\n- Principal vulnerabilities:\n  - Credit and funding risks related to dollarization.\n  - Concentration in the banking sector.\n  - Reliance on nonresident deposits.\n- Nonperforming loans (NPLs) are gradually declining from their peak in 2009, but credit growth is above its long-term sustainable trend.\n- Market risks are very limited, and trading books do not exist.\n- Credit portfolio concentration risks are limited: default by the largest three borrowers would require additional capital of GEL 50 million for five banks."
    },
    {
      "heading": "Dollarization-related risks and central bank constraints",
      "content": "- Two major dollarization-related problems:\n  - 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).\n  - The National Bank of Georgia (NBG) has limited ability to provide liquidity support in USD and other foreign currencies.\n- 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.\n- 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."
    },
    {
      "heading": "Stress testing results and capital adequacy",
      "content": "- 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.\n- Tests covered scenarios ranging from slow growth to severe macroeconomic shocks.\n- Results indicate that major banks would generally remain adequately capitalized, taking into account current profits and introduction of Basel II.\n- In adverse scenarios, recapitalization needs are manageable in terms of GDP: 1.6 percent for the worst-case scenario.\n- 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.\n- High levels of profitability and solid net interest margins would decline during crisis periods, reducing net interest and other income."
    },
    {
      "heading": "Funding risks and recommended mitigation",
      "content": "- Funding risks stem from concentration and reliance on nonresident deposits.\n- Policy actions to reduce vulnerabilities:\n  - Further diversification of funding sources.\n  - De-dollarization to reduce FX-related credit and liquidity risks.\n  - Introduction of Individual Capital Guidance, especially for the weakest banks, to avoid deterioration of loss-absorption capacity."
    },
    {
      "heading": "Operational and supervisory implications",
      "content": "- Continued build-up of capital buffers is warranted while FX-denominated loans remain a substantial share of loan portfolios.\n- Enhanced monitoring of banks that are only marginally above minimum capital requirements is necessary.\n- 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.\n\nInternational Monetary Fund. Georgia: Financial Sector Assessment Program-Stress Testing the Banking Sector-Technical Note (IMF Staff Country Reports 2015, 007).\n\n---\n\n Content in this bundle\n\n- cr1507\n  - cr1507 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - cr1507 (PDF){rel=\"external\" type=\"application/pdf\"}"
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    "Published: January 8, 2015",
    "Series: IMF Staff Country Reports",
    "DOI: https://doi.org/10.5089/9781498306591.002",
    "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:",
    "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.",
    "Two major dollarization-related problems:",
    "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.",
    "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 stem from concentration and reliance on nonresident deposits.",
    "Policy actions to reduce vulnerabilities:",
    "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.",
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