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IMF Country Report No. 23/4

GEORGIA

TECHNICAL ASSISTANCE REPORT—OPERATIONALIZING THE NEW BANK RECOVERY AND RESOLUTION FRAMEWORKS

January 2023

This technical assistance report on Georgia was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in November 2022.

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TECHNICAL REPORT

GEORGIA

Operationalizing the New Bank Recovery and Resolution Framework

December 2022

Prepared By

Alessandro Santoni (Mission Chief, MCM), and Antonio Carrascosa and David Scott (External Experts)

Monetary and Capital Markets Department

Contents

• Glossary

• Preface

• Executive Summary

• I. Introduction

• II. Recovery Plan, Resolution Plan, and Early Intervention

• A. Recovery Planning

• B. Early Intervention and FOLTF

• C. Resolution Planning

• III. Bank Crisis Management

• A. Resolution Powers

• B. Operationalization of the Resolution Regime

• C. Temporary Public Funding and Resolution Fund

• D. Creditor Hierarchy in Liquidation and Resolution

• IV. Inter-Agency Crisis Preparedness and Coordination

• V. Next Steps

• Box

• 1. Authorities Proposed New Creditor Hierarchy

• Tables

• 1. Key Recommendations

• 2. Financial Soundness Indicators

• Appendices

• I. Guidance for Supervisors on Recovery Plans

• II. Guidance on the Operationalization of Resolution Tools

• III. Generic Playbook Content and Structure

Glossary

Preface

At the request of the National Bank of Georgia (NBG), a Monetary and Capital Markets (MCM) Department mission provided offsite Technical Assistance (TA) between March 17 and April 20, 2022 to assist the authorities in operationalizing the new bank recovery and resolution framework. The mission team comprised Alessandro Santoni (Mission Chief, MCM), and Antonio Carrascosa and David Scott (external experts).

The mission engaged by means of virtual meetings, workshops, and seminars with officers of the NBG, the Ministry of Finance (MoF), and the Deposit Insurance Agency (DIA), including via several presentations made by the NBG and the DIA on recovery, resolution, and deposit insurance. Each session was followed by Q&A sessions, and the mission benefited from forthright and constructive discussions with the NBG and DIA management and staff. Meetings were also held with senior officers of the MoF and with DIA Board members regarding their respective roles in financial stability, crisis management, and bank resolution. The mission met also with officials of the Insurance State Supervision Service (ISSA), and senior management of the Bank of Georgia, TBC Bank, and Liberty Bank.

The mission team would like to express its appreciation to Governor Koba Gvenetadze and to the staff of the NBG, MoF, DIA, and ISSA for the excellent cooperation and arrangements that were made to facilitate its work, as well as for constructive and open discussions.

The second mission, targeted for September 2022, will focus largely on assisting the NBG and the MoF in the development of resolvability assessments, the preparation of playbooks for the bail-in and sale of business tools, the development of resolution plans and strategies as well as other elements of the resolution regime.

Executive Summary

The Georgian authorities have indicated their interest in operationalizing their recovery, resolution, and crisis management frameworks. The mission provided extensive TA on these topics. In collaboration with the authorities, the following priorities were identified:

• Reinforce the Resolution Authority (RA) function within the NBG while clearly defining internal guidelines for engagement and escalation processes.

• Introduce objective and quantitative criteria for triggering escalation processes for supervisory measures, early intervention, failing-or-likely-to-fail (FOLTF) determinations, and resolution.

• Further develop guidelines for banks in the preparation of recovery plans and advance the NBG assessment and feedback process.

• Start setting loss-absorbing capital (LAC) targets to enable use of the bail-in tool and ensure banks can provide the necessary information in a timely manner to the resolution authorities, in order to (i) determine the banks' capacity to absorb losses; (ii) monitor the build-up of that capacity; and (iii) ensure compliance with requirements set by the resolution function.

• Analyze alternatives to the current temporary public funding (TPF) arrangements, especially the scope to deploy all such funding through the Resolution Fund and the potential use—subject to strict safeguards—of the deposit insurance fund (DIF) to finance resolution actions.

• Pursue further work in resolution planning with respect to being able to implement the resolution tools, ensure operational continuity and liquidity in resolution, and enable separability.

• Perform stock taking of contractual clauses in banks' current subordinated and senior debt issuances to determine whether the bail-in-ability of these instruments is recognized.

• Adopt a medium-term program to inventory existing policy and procedure playbooks, set priorities, fill gaps and overcome shortcomings, and commence work on agency-wide contingency plans.

• Adopt an annual playbook and contingency plan testing program planning cycle; and

• Redraft the Interagency Financial Stability Committee (IFSC) Charter, considering the inputs of this TA mission.

Georgia has made considerable progress in developing the infrastructure needed for an effective bank recovery and resolution regime. In 2017, a Deposit Insurance System Law was adopted was adopted to protect deposits of natural persons when a bank fails and is liquidated.¹ In 2019, both the NBG and the Banking Laws were amended to provide the authorities with powers to resolve banks that—in the past—might have been deemed too big to fail. Following recommendations of the 2021 FSAP, the new legislation brought into force in September 2020 provides a comprehensive legal framework for the resolution of banks, including triggers, legal powers, and safeguards. In 2020 the NBG published a series of rules specifying its policies and procedures for the use of its new powers and, jointly with the MoF, published regulations addressing the use of TPF to mitigate the potential systemic implications of bank failures. The 2021 FSAP focused on financial safety nets, with special attention to the resolution and crisis management frameworks, and made numerous recommendations. This TA addressed several of those recommendations and the mission's advice to the authorities is summarized in the following paragraphs.

The NBG introduced recovery planning requirements for all banks. The mission provided guidance to strengthen the design of recovery planning requirements. The NBG should reinforce internal procedures for the review and assessment of recovery plans by establishing a small team of senior supervisors to lead and coordinate the review of all recovery plans.

The current escalation process from going-concern to gone-concern does not provide the supervisors with sufficient and adequate triggers to mitigate risks at a sufficiently early stage. The NBG should introduce internal guidance to clarify these triggers. These adjustments would also help reduce the potential for arbitrariness and promote transparency (e.g., by providing guidance on the logical progression of increasingly intrusive actions to deal with situations ranging from minor breaches to insolvency).

The mission recommends clarifying Article 30 of the Banking Law, which explicitly mentions only the temporary administrator as early intervention measures (EIMs). We understood that the authorities have a more extended view (measures are already included in Article 30, but not explicitly mentioned as EIMs). The NBG should review its internal supervisory early intervention framework to integrate the activation of recovery plans. The NBG should also adopt a formal communication policy process for the adoption of EIMs and failing-or-likely-to-fail (FOLTF) determinations.

The mission reviewed the FOLTF determination process and advised on best practices. The authorities have no clear internal standards or indicators of nonviability to help guide decisions (e.g., there are no forward-looking indicators of nonviability). The NBG should introduce clear quantitative and qualitative standards/guidelines or indicators of nonviability. While the determination that an institution is FOLTF remains the discretionary assessment of the supervisory function, guidelines should be adopted that set forth broad elements on which this judgment should be based.

A key recommendation of the mission is to strengthen the NBG's resolution function. This should start with implementation of the planned repositioning of the Resolution and Liquidation Division (RLD) into the Financial Stability Department, which reports directly to the governor, and which will create the institutional separation from the supervisory function that was recommended in the 2021 FSAP. The independence of the banking resolution function will depend also on the availability of sufficient human and technical resources. In this respect, however, no increase in resources is planned at present.

The RLD should work further on policies and processes to facilitate the drafting of resolution plans and to enable the adoption of sound resolution decisions. It is also essential to have robust legal advice to adopt sound resolution decisions. Some outsourcing is feasible, especially for some specific tasks, but a specialized internal legal team is needed.

The NBG should ensure that arrangements and procedures for the exchange of information between the supervisory and resolution authorities are in place. While cooperation is reportedly good, it is necessary to formalize that cooperation, especially with respect to documentation prepared by the supervisory function (e.g., onsite inspection findings, EIMs taken), which will be essential to transmit to the resolution function.

The operationalization of the resolution regime requires that playbooks be developed for the main resolution tools: bail-in, sale of business, and bridge bank. Such a playbook has already been developed for bank liquidations. The mission provided a list of the main steps to follow when implementing resolution tools. The playbooks should specify the allocation of responsibilities and necessary interactions among relevant NBG staff.

The authorities proposed revisions to the credit hierarchy to achieve the 2021 FSAP recommendations. The mission expressed general support for the proposed revisions, but suggested the authorities examine the status of the DIA when subrogated for insured depositors under the DIS Law, to ensure it is consistent with the proposed hierarchy amendments.

The mission provided guidance on the general architecture of intra- and interagency contingency plans, which serve as the building blocks for a national financial crisis preparedness plan. These include departmental and scenario-specific plans, whole-of-agency plans, and bilateral plans between two or more agencies. The mission provided guidance on the general structure and content of such plans.

A few agency-specific recommendations were made. The NBG should update its emergency liquidity assistance (ELA) playbook to address potential ELA in resolution. The MoF should develop a playbook for use of its TPF powers, including via the Resolution Fund. The MoF needs playbooks addressing its contingent liabilities for NBG ELA and its potential lending to the DIF. It also requires a bridge-bank playbook to complement that of the NBG. The DIA requires playbooks for the potential need to liquify its investment portfolio and to borrow if the DIF should require replenishment.

The mission advised on developing bilateral interagency plans. These include an NBG-MoF bridge bank playbook (integrating the agency-specific playbooks) and a playbook addressing resolution funding. The NBG and the MoF should consider a broader joint playbook addressing a systemic crisis scenario. The NBG and the DIA should develop a playbook for bank liquidation. The DIA and the NBG should agree on a playbook addressing the DIA's ability to liquify the DIF investment portfolio. The DIA and the MoF should consider a playbook for coordination in the event the DIA needs to borrow from the MoF to replenish the DIF.

Each of the IFSC member agencies should eventually put in place internal whole-of-agency financial crisis contingency plans. The mission presented the potential overall structure of such a plan, using the NBG as an example. The long-term goal is an integrated financial sector crisis contingency plan that leverages upon relevant internal playbooks and bilateral plans. The mission presented the potential overall structure of such a plan.

The mission advised on a program of periodic testing of key playbooks and plans. Agency senior management should provide oversight. Good practice is to adopt an annual planning cycle, identifying the exercises deemed priorities for the coming year. Results of tests and actions to be taken (enhancements of playbooks) should be reported to senior management.

The mission suggested a medium-term work program to strengthen crisis preparedness (e.g., over the next three years). This includes an inventory of key departmental-level, scenario-specific, and bilateral playbooks to identify gaps and shortcomings that could be completed in 2022. Priorities for overcoming the absence of playbooks and shortcomings in current documents should be set by agency management and incorporated into departmental and agency-wide workplans for the remainder of 2022 and 2023. Work on developing agency-wide financial crisis contingency plans, at least within the NBG and the MoF, could be contemplated for 2023 and 2024.

The mission advised on the roles of agency senior management and the IFSC in the work program suggested in this TA. The work program should be endorsed and overseen by senior management within the IFSC member agencies, with high-level oversight provided by the IFSC. While agency senior management is responsible for implementing the work program in each IFSC agency, the IFSC should serve in an information sharing and process-coordination role. The authorities proposed changes to the IFSC Charter text to reflect such a role. The mission recommended the authorities consider a more substantive redraft of the charter considering the finalized inputs of this first TA mission. It recommended forming a standing working group comprised of a small number of individuals from the member agencies to support the IFSC members in overseeing the implementation of the work program.

^{Table 1.}

Georgia: Key Recommendations

¹H: High, M: Medium.

²Near term: < 12 months; Medium term: 12 to 24 months.

^{Table 1.}

Georgia: Key Recommendations

Recommendations and Authority Responsible for Implementation	Priority 1	Timeframe 2
Strengthen the supervisory measures and EIM regime by clarifying internal triggers (quantitative) for gradual escalation process.	M	MT
Clarify the escalation process of supervisory measures and EIM adoption and the engagement with resolution function.	M	MT
Adopt a formal communication policy addressing the use of EIMs.	M	MT
Introduce clear standards or indicators of nonviability to help guide FOLTF determination.	H	MT
Adopt a clear separation of responsibility for recovery and resolution planning between the supervisory and resolution functions.	H	NT
Invest in recruiting and training of resolution function staff.	H	NT
Establish a small team of senior supervisors with the appropriate experience and knowledge to lead and coordinate the review of all recovery plans.	H	NT
Provide more guidance to banks for preparing and maintaining up-to-date recovery plans.	M	MT
Start setting LAC targets (in line with the 2024 time horizon) and ensure banks can provide the information necessary to monitor LAC build-up and to ensure progressive compliance.	M	MT
Analyze alternatives to current TPF policies, especially to consider the deployment of all TPF through the Resolution Fund and to use the DIF to finance resolution transactions.	M	MT
Undertake further work in resolution planning; in particular, the ability to implement the resolution tools, to ensure operational continuity and liquidity in resolution, and to enable separability.	H	NT
Perform a stock taking of contractual clauses in banks' current issuances of subordinated and senior debt issuances to determine whether the bail-in-ability of the instruments is recognized.	M	MT
Adopt formal work programs involving inventorying key playbooks to identify gaps and incompleteness, setting priorities for remedying those, and initiating work on whole-of-agency financial crisis management plans.	H	NT
Introduce formal playbooks and plan testing programs on an annual cycle.	M	NT
Redraft the IFSC Charter with sections on its role in normal times and in crisis times.	M	NT

¹H: High, M: Medium.

²Near term: < 12 months; Medium term: 12 to 24 months.

View Table

^{Table 1.}

Georgia: Key Recommendations

Recommendations and Authority Responsible for Implementation	Priority 1	Timeframe 2
Strengthen the supervisory measures and EIM regime by clarifying internal triggers (quantitative) for gradual escalation process.	M	MT
Clarify the escalation process of supervisory measures and EIM adoption and the engagement with resolution function.	M	MT
Adopt a formal communication policy addressing the use of EIMs.	M	MT
Introduce clear standards or indicators of nonviability to help guide FOLTF determination.	H	MT
Adopt a clear separation of responsibility for recovery and resolution planning between the supervisory and resolution functions.	H	NT
Invest in recruiting and training of resolution function staff.	H	NT
Establish a small team of senior supervisors with the appropriate experience and knowledge to lead and coordinate the review of all recovery plans.	H	NT
Provide more guidance to banks for preparing and maintaining up-to-date recovery plans.	M	MT
Start setting LAC targets (in line with the 2024 time horizon) and ensure banks can provide the information necessary to monitor LAC build-up and to ensure progressive compliance.	M	MT
Analyze alternatives to current TPF policies, especially to consider the deployment of all TPF through the Resolution Fund and to use the DIF to finance resolution transactions.	M	MT
Undertake further work in resolution planning; in particular, the ability to implement the resolution tools, to ensure operational continuity and liquidity in resolution, and to enable separability.	H	NT
Perform a stock taking of contractual clauses in banks' current issuances of subordinated and senior debt issuances to determine whether the bail-in-ability of the instruments is recognized.	M	MT
Adopt formal work programs involving inventorying key playbooks to identify gaps and incompleteness, setting priorities for remedying those, and initiating work on whole-of-agency financial crisis management plans.	H	NT
Introduce formal playbooks and plan testing programs on an annual cycle.	M	NT
Redraft the IFSC Charter with sections on its role in normal times and in crisis times.	M	NT

¹H: High, M: Medium.

²Near term: < 12 months; Medium term: 12 to 24 months.