Financial Sector

24. Source data for the FA produced by the MSD are exclusively the SRFs for the central bank, ODCs, and OFCs. The SRFs contain detailed data by financial instrument, currency of denomination (domestic and foreign) and counterpart sector. This wealth of information allows a precise distribution of financial instruments for the financial sector, and can be used to allocate such instruments to counterpart sectors.

25. Coverage of the financial sector is comprehensive and sufficient to produce FA for the financial sector. ODC data do not include credit unions, but their share in total assets is irrelevant, and their businesses are carried out within closed groups. OFC data comprise MFOs and ICs, which constitute three quarters of a subsector whose assets are less than ten percent of the total financial system.

26. The classification and sectoring of financial instruments are in line with the methodology recommended by the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG). This positive outcome is due to a proper structure of the chart of accounts and additional granular information reported by commercial banks for supervisory and monetary statistics purposes. Some minor shortcomings were found in the sectoring of financial instruments. They were explained to the MSD and eliminated during the stay of the mission in Tbilisi.

27. Valuation of securities deviates from the 2008 System of National Accounts (2008 SNA) and MFSMCG methodology. Debt securities are reported by banks at nominal, instead of at market, values. However, the bulk of debt securities held by commercial banks are issued by the central government and the NBG, and almost all of them are held to maturity. The securities market in Georgia is very illiquid, and therefore a market value for these instruments is difficult to establish. Banks report valuation changes of debt securities as supplementary information, but the MSD considers them as overestimated and not reliable. In cases of illiquid markets, fair values can be estimated discounting the future cash flows by a market interest rate, which for Georgia could be the available auction rate of government bonds. For debt securities issued by nonresidents, some appropriate price index could be used as a proxy to estimate revaluations. Holdings of equity shares are valued at acquisition cost, which presents a more significant deviation from the market prices recommended by the statistical methodology and the requirements of International Financial Reporting Standards (IFRS).² The introduction of the BI software should facilitate the estimation of fair values and revaluations of debt securities.

28. Recommended actions: Until commercial banks report reliable data on market prices and revaluations of debt and equity securities, approximate their market price using fair values. Facilitate the estimation of fair values by developing a routine in the BI software to be implemented in early 2018.

29. Recommended actions: For debt securities issued by nonresidents, use a price index for revaluations due to price changes, and use original currency of denomination for revaluations due to exchange rate adjustments.

Nonfinancial Sectors

30. The source data used to construct FA tables should be expanded with data for nonfinancial sectors. Currently, the MSD is relying exclusively on monetary data from the SRFs for the construction of FA tables. Thus, these tables contain gaps in the positions (assets and liabilities) and flows of financial instruments of the nonfinancial sectors (government, NFCs, and HHs) and of these sectors with the rest of the world. Those data gaps force the MSD to allocate as residual an important proportion of nonfinancial sectors’ assets. Information on nonfinancial sectors is mainly available from national accounts, GFS, or corporate surveys, areas beyond the responsibility of the NBG. To obtain such data, the NBG needs the support and close collaboration with other agencies, in particular, Geostat and the MOF.

31. Recommended actions: Coordinate with Geostat and the MOF the sharing of data on stock and flows of financial instruments held by nonfinancial sectors.

Business Intelligence Software

32. Starting in January 2018, the NBG will centralize data reporting from the financial institutions in its SebStat database. Currently, commercial banks report their data to the SGSPD for supervisory purposes, and parts are used by the MSD to produce SRF 2SR. Commercial banks also report supplementary data to calculate revaluations. Data on the NBG (used to produce SRF 1SR) and from OFCs (used for SRF 4SR) are currently not stored in the SebStat, but is planned to be done at a later date (not yet specified).

33. The NBG is in the process of developing a BI software to run in the SebStat, with full implementation envisaged by May 2018. This will create a comprehensive platform to process, analyze, produce, and disseminate monetary data. The BI software will make use of the expanded reporting requirement that commercial banks need to fulfill in January 2018, with data on stocks, gross transactions, revaluations, loan write-offs, provisions for loan losses, and other OCVA (e.g., reclassifications) in original currency of denomination for all financial instruments.

34. Recommended actions: Develop in the BI software a program to automatically calculate from the SebStat the series needed for estimating revaluations, OCVA, and transactions.

Estimation of Flow Components

35. The MSD has made significant progress in the compilation of flow-based monetary statistics. Following the 2016 mission’s recommendations, the MSD developed an ad-hoc program to calculate exchange rate revaluations for cash holdings, deposits, and loans by original currency and counterpart sector. The program can be integrated into the BI software to automatically generate the needed adjustments for the FA tables.

36. The information available on loans and deposits permits an accurate estimation of valuation changes due to exchange rate movements for the central bank and ODCs. For the NBG, the information is available from its trial balance. Commercial banks report to the NBG supplementary information on their accounts split by original currency and counterpart sector. Using this information on stocks the MSD applies the formula recommended by the MSMFCG (par. 5.249) to estimate revaluations at a granular level.

37. Information from OFCs on foreign-currency denominated assets and liabilities are split into domestic and foreign currency, but without differentiating by original foreign currency. Apart for positions with ODCs, the MSD cannot estimate revaluations with accuracy. However, the two subsectors of OFCs covered by SRF 4SR represent less than 8 percent of total assets of the financial sector, and only one-third of their assets and liabilities are denominated in foreign currency, with the most common foreign currency used being the U.S. dollar. Hence, revaluations for exchange rate changes can be calculated using a U.S. dollar index for all foreign-currency denominated accounts.

38. Recommended actions: Estimate revaluations due to exchange rate changes of the OFC sector using a U.S. dollar-based index.

39. The SebStat collects data on OCVA reported by commercial banks, but the MSD deems this information unreliable. Commercial banks report supplementary information on the valuation changes of their holdings of securities, but the MSD believes that most of the reported valuation changes are solely due to exchange rate changes and overestimated, for which reason the MSD does not use them. The situation should change once commercial banks start reporting to the SebStat comprehensive data on stocks, gross transactions, revaluations, and OCVA in January 2018.

40. Other changes in the volume of assets should be eliminated from total flows (difference in stocks) to estimate transactions during the relevant period. In the case of monetary accounts, OCVA is normally triggered by the write-offs of loans and, in extraordinary cases, by the repudiation of debt securities by the issuer. Other sources of OCVA are the reclassification of instruments (e.g., loans that become negotiable are reclassified as securities), or change in the sector classification of the counterpart (e.g., an OFC that starts operating as ODC). Currently, the MSD does not have access to information on OCVA for the ODC sector. As for the case of revaluation of securities, the problem should be solved with the new reporting requirements to be implemented starting in January 2018.

41. Recommended actions: Estimate revaluations for securities and OCVA in the ODC accounts once commercial banks start reporting detailed information on stocks, gross transactions, revaluations, and OCVA.

Consolidation Basis

56. FSIs for Georgia are compiled using a “domestic consolidation” (DC) basis, which is acceptable considering the structure of the country’s financial system. DC data consolidate flows and positions of (domestic and foreign controlled) resident DTs with their DT subsidiaries resident in the economy, plus resident branches of foreign banks. Resident non-DT financial institutions are excluded from this consolidation basis. Although five banks have domestically and foreign incorporated non-DT subsidiaries and one bank a DT subsidiary abroad (see Figure 1), the size of these subsidiaries is small and their inclusion will not materially affect the calculation of the FSIs for the whole financial system.

Georgia: Deposit Takers and Their Subsidiaries^*

Citation: IMF Staff Country Reports 2018, 060; 10.5089/9781484344989.002.A001

^* The Figure refers only to banks that have subsidiaries.Source: NBG and IMF staff.

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Georgia: Deposit Takers and Their Subsidiaries^*

Citation: IMF Staff Country Reports 2018, 060; 10.5089/9781484344989.002.A001

^* The Figure refers only to banks that have subsidiaries.Source: NBG and IMF staff.

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Georgia: Deposit Takers and Their Subsidiaries^*

Citation: IMF Staff Country Reports 2018, 060; 10.5089/9781484344989.002.A001

^* The Figure refers only to banks that have subsidiaries.Source: NBG and IMF staff.

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57. Credit unions are excluded from the coverage of the DT sector, but this does not have any significant impact on the compiled FSIs. Credit unions carry out business within closed groups and the magnitude of their assets is irrelevant. Their exclusion will not impact the final value of the indicators, and would only add a compilation burden.

The Regulatory Framework in Georgia

58. Since January 2015, Georgia’s regulatory framework follows Basel II and Basel III simultaneously. Nevertheless, this fact does not affect the compilation of the current set of FSIs for DTs. The simultaneous application of both regulatory principles by all banks refers to the calculation of the components of regulatory capital according to Basel III, while Basel II elements prevail in the calculation of risk-weighted assets. The new liquidity requirements of Basel III have been enforced only for the Liquidity Coverage Ratio (September 2017), while the Net Stable Funding Ratio will be gradually introduced starting in 2018.

59. In addition to the risk-weighted-assets measure of the Basel principles, the SGSPD also computes more stringent weights for foreign-currency denominated loans. In this way, it produces two measures of capital adequacy: one following Basel definitions, and the other with augmented risk-weight for foreign-currency denominated assets.

Accounting Principles

60. Commercial banks in Georgia follow IFRSs. IFRSs provide a framework for the presentation of financial statements, including implementation guidance. IFRSs focus on the preparation and dissemination of financial statements of individual firms. The amended FSI Guide defers to IFRSs for the recording and reporting of source data for FSIs.

61. Financial instruments are valued on balance sheet along the recommendations of the FSI Guide, although some discrepancies might exist for debt securities and equity shares. Debt securities are reported by commercial banks at their nominal value (acquisition cost plus accrued and not paid interest), which is the IFRSs rule for securities held to maturity but not for those designated for trade or available for sale, which should be reported at their market value. In practice, this might not constitute a serious problem in Georgia because the bulk of securities held by banks are government’s and central bank’s instruments held to maturity, with little trade on an illiquid market. Banks report shares at their acquisition cost, but for supervisory (and FSI compilation) purposes, their value is reduced by the constituted accumulated investment loss reserves. This is a one-way prudential approach, whereby the book value of shares is reduced in case of losses, but not increased to reflect market appreciation of the held shares. Foreign currency denominated financial instruments are converted into national currency at the NBG’s official exchange rate, which is equivalent to a market rate.

62. Loans are defined as nonperforming using the 90-days past due criterion or evidence that the loan may become nonperforming before this date. As a rule, any loan for which a debtor has not made the scheduled payments of principal or interest for at least 90 days must be classified as nonperforming. Additionally, banks may designate a loan as nonperforming if they have evidence that payments will not be made, for instance, in case of bankruptcy of the debtor, which is in line with IFRS. The 2007 amendments to the FSI Guide restrict the classification of nonperforming loans to only loans overdue 90 days or more. To reconcile this discrepancy, on its website the NBG disseminates both measures of nonperforming loans, while to STA it reports the indicator using the amended FSI Guide definition.

Source Data

63. Source data are the aggregated sectoral balance sheet reported for monetary statistics (SRF 2SR), supplemented by the aggregated income statement of commercial banks and memorandum series. Aggregation of data does not constitute a problem for the DC basis, because there are no ownership relations between resident banks; i.e., no resident bank has a DT subsidiary in the economy. Balance sheet data are comprehensive and presented by instrument, currency of denomination (local and foreign), and counterpart sector. The aggregated income statement contains all profit and loss accounts (more than 300). Memorandum series consist of supervisory series compiled by the SGSPD plus specific series needed for FSIs sourced from the individual accounts of the commercial banks’ balance sheet.

64. Reports have a monthly frequency and are used by the MSD for internal compilation of FSIs. However, the series are disseminated and reported to STA—for posting on the IMF’s website—only with a quarterly frequency. Since monthly data are available, core and encouraged FSIs for DTs should be disseminated on a monthly basis, including historical series.

65. Recommended actions: Disseminate core and encouraged FSIs for DTs on a monthly basis on the NBG’s website and report them to STA with monthly frequency for posting on the IMF’s webpage. Report to STA historical monthly series from January 2001 onwards.

Mapping from the Source Data to the FSI Reporting Forms

66. Together with staff of the MSD and the SGSPD, the mission reviewed the methodology used to compile FSIs from the source data. Source data and methodology broadly comply with the recommendations of the FSI Guide, with a few exceptions that slightly affect the calculation of some indicators. Table 2 presents the shortcomings detected by the mission, which are discussed below. The MSD will correspondingly revise the bridge tables used to generate the FSIs.

Table 2.

Georgia: The Financial Corporations Sector

(mill. GEL, end-August 2017)

Source: NBG.

Table 2.

Georgia: The Financial Corporations Sector

(mill. GEL, end-August 2017)

Financial Corporation (FC) Sub-Sector				Asset size	No. of Institutions	Percent of asset size to total subsector assets	Percent of asset size to total financial sector assets
National Bank of Georgia				9,481.8
Other Depository Corporations
	Commercial Banks			31,518.2	16	100.0%	89.6%
			Domestically controlled	2,792.2	3	8.9%	7.9%
			Foreign controlled	28,726.0	13	91.1%	81.7%
	Credit Unions			9.5	8	0.0%	0.0%
Total				31,527.7	24	100.0%	89.6%
Other Financial Corporations
	Other Financial Intermediaries except ICPF			2,223.9	170	61.0%	6.3%
		Microfinance organizations		2,019.9	83	55.4%	5.7%
			Domestically controlled	1,236.3	70	33.9%	3.5%
			Foreign controlled	783.6	13	21.5%	2.2%
		Leasing Companies		204.0	4	5.6%	0.6%
	Pawnshops			712.2	n.a.	19.5%	2.0%
	Financial auxiliaries			167.2	1,269	46%	0.5%
		Stock Exchanges		3.9	1	0.1%	0.0%
		Brokerage Companies		42.5	6	1.2%	0.1%
		Money Remittance Units		3.3	124	0.1%	0.0%
		Exchange Bureaus		117.5	1,138	3.2%	0.3%
	Insurance Corporations			520.1	15	143%	1.5%
		Life and Non-life Insurance		516.8	14	14.2%	1.5%
		Non-life Insurance		3.3	1	0.1%	0.0%
	Pension Funds			23.9	3	0.7%	0.1%
Total				3,647.3	1,457	100.0%	10.4%
Total Assets				35,175.0	1,481		100%

Source: NBG.

View Table

Table 2.

Georgia: The Financial Corporations Sector

(mill. GEL, end-August 2017)

Financial Corporation (FC) Sub-Sector				Asset size	No. of Institutions	Percent of asset size to total subsector assets	Percent of asset size to total financial sector assets
National Bank of Georgia				9,481.8
Other Depository Corporations
	Commercial Banks			31,518.2	16	100.0%	89.6%
			Domestically controlled	2,792.2	3	8.9%	7.9%
			Foreign controlled	28,726.0	13	91.1%	81.7%
	Credit Unions			9.5	8	0.0%	0.0%
Total				31,527.7	24	100.0%	89.6%
Other Financial Corporations
	Other Financial Intermediaries except ICPF			2,223.9	170	61.0%	6.3%
		Microfinance organizations		2,019.9	83	55.4%	5.7%
			Domestically controlled	1,236.3	70	33.9%	3.5%
			Foreign controlled	783.6	13	21.5%	2.2%
		Leasing Companies		204.0	4	5.6%	0.6%
	Pawnshops			712.2	n.a.	19.5%	2.0%
	Financial auxiliaries			167.2	1,269	46%	0.5%
		Stock Exchanges		3.9	1	0.1%	0.0%
		Brokerage Companies		42.5	6	1.2%	0.1%
		Money Remittance Units		3.3	124	0.1%	0.0%
		Exchange Bureaus		117.5	1,138	3.2%	0.3%
	Insurance Corporations			520.1	15	143%	1.5%
		Life and Non-life Insurance		516.8	14	14.2%	1.5%
		Non-life Insurance		3.3	1	0.1%	0.0%
	Pension Funds			23.9	3	0.7%	0.1%
Total				3,647.3	1,457	100.0%	10.4%
Total Assets				35,175.0	1,481		100%

Source: NBG.

67. Recommended actions: Revise the bridge tables used by the MSD to generate FSIs for DTs according to the mission’s recommendations.

68. The largest departures from the FSI Guide methodology are observed in the income- and expense-based indicators. This is because for Noninterest income the SGSPD nets fees and commissions payable from fees and commission receivable, instead of classifying the former as Other expenses. This netting artificially reduces Noninterest income and Noninterest expenses, affecting the indicators that use Gross income as denominator, namely FSIs I008 (Interest margin to gross income), I009 (Noninterest expenses to gross income), and I018 (Trading income to gross income). It also affects FSI I019 (Personnel expenses to noninterest expenses). The mission calculated the revised indicators with data for August 2017, finding that I008 would change from 66.5 to 60.4 percent, I009 from 47.4 to 52.9 percent, I018 from 8.4 to 6.9 percent, and I019 from 58.4 to 47.5 percent.

69. The remaining recommended revisions only marginally affect, or not at all, the calculated FSIs. One small change will occur in indicators I006 (Return on assets) and I009 (Return on equity) because the MSD’s mapping does not pull the balance of account 8617 (Losses from hedging operations in foreign currency). Return on assets (ROA) and return on equity (ROE) are calculated before extraordinary items and taxes, as recommended on the FSI Guide.

Capital adequacy indicators are calculated in line with Basel supervisory principles and the FSI Guide methodology. Supervisory deductions affecting Tier 1 capital are netted from this concept before adding to the concept of Total regulatory capital (Tier 1 plus Tier 2 capital), from which other regulatory deductions are subtracted to arrive to the concept of Total net capital resources. Beyond the capital adequacy ratio required by Basel III, the NBG publishes a more stringent measure, where foreign-currency denominated assets add weight to total risk-weighted assets.

Table 3.

Georgia: Recommended Revisions to the FSI Mapping

Table 3.

Georgia: Recommended Revisions to the FSI Mapping

Accounts	From	To	Observations
Income and Expense Statement
8401–8419 – Fees and Commission Expense (NC, FC)	Negative Noninterest Income, Fees and Commissions Receivable	Noninterest Expenses	Fees and commission to be presented on a gross basis
6503, 6513 -Dividends on Investment Totaling more than 50% of Authorized Capital (NC, FC)	Noninterest Income, Other Income	Noninterest Income, Prorated Earnings	Accounts record dividends on ownership investment (>50%)
6901–6915 – Gains Arising from Investment in Securities (NC, FC)	Other Income	Gains and Losses on Financial Instruments	Accounts record gains from investments in securities
8617 – Losses from Dealing Operations in Foreign Currency	Not classified	Gains and Losses on Financial Instruments
8902–8915 – Losses Arising from Investments in Securities (NC, FC)	Other Expenses	Gains and Losses on Financial Instruments	Accounts record losses from investments in securities
8901 – Losses from Operations with Stocks	Other Financial Assets Provisions	Gains and Losses on Financial Instruments	Account records losses from stock trading
Balance Sheet
Accumulated Depreciations	Netting from Other Assets	Netting from Fixed Assets
Insurance Technical Reserves	Capital and Reserves	Other Liabilities
Deposits Excluded from Broad Money	Not currently allocated	Customer Deposits	Relates only to deposits of OFCs, NFCs, and HHs

View Table

Table 3.

Georgia: Recommended Revisions to the FSI Mapping

Accounts	From	To	Observations
Income and Expense Statement
8401–8419 – Fees and Commission Expense (NC, FC)	Negative Noninterest Income, Fees and Commissions Receivable	Noninterest Expenses	Fees and commission to be presented on a gross basis
6503, 6513 -Dividends on Investment Totaling more than 50% of Authorized Capital (NC, FC)	Noninterest Income, Other Income	Noninterest Income, Prorated Earnings	Accounts record dividends on ownership investment (>50%)
6901–6915 – Gains Arising from Investment in Securities (NC, FC)	Other Income	Gains and Losses on Financial Instruments	Accounts record gains from investments in securities
8617 – Losses from Dealing Operations in Foreign Currency	Not classified	Gains and Losses on Financial Instruments
8902–8915 – Losses Arising from Investments in Securities (NC, FC)	Other Expenses	Gains and Losses on Financial Instruments	Accounts record losses from investments in securities
8901 – Losses from Operations with Stocks	Other Financial Assets Provisions	Gains and Losses on Financial Instruments	Account records losses from stock trading
Balance Sheet
Accumulated Depreciations	Netting from Other Assets	Netting from Fixed Assets
Insurance Technical Reserves	Capital and Reserves	Other Liabilities
Deposits Excluded from Broad Money	Not currently allocated	Customer Deposits	Relates only to deposits of OFCs, NFCs, and HHs

70. The NBG uses both core and broad measures when calculating the two liquidity indicators: Liquid assets to total assets (I010) and Liquid assets to short-term liabilities (I011). Short- and long-term financial instruments are defined in the chart of accounts based on their original maturity, with the benchmark being one year. However, for the definition of liquid assets for FSIs, the SGSPD includes only instruments with a remaining maturity of one week or less. The core measure comprises cash, reserve deposits, and deposits with resident and nonresident banks in local and foreign currency that comply with the maturity requirement. The broad measure adds central government debt securities in local and foreign currency. Both measures are in line with the FSI Guide’s methodology.

71. Three FSIs for DTs are not compiled by the NBG. These are Large exposures to capital (I014) and Gross asset (and liability) positions in financial derivatives to capital (I016, I017). In the first case, because the NBG has set strict limits to large exposures⁸ that cannot be exceeded and therefore large exposures are not reported. Financial derivatives are recorded by banks off-balance sheet—which is against the FSI Guide and IFRS guidelines—and therefore have a zero value on the balance sheet. However, the financial derivative market in Georgia is very limited and it is not expected that such accounts could show high balances.