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Back to the Past- National Bank Regains Supervision over Finance Sector

At the end of February Government decided to return finance sector supervision functions to National Bank of Georgia (NBG).

However, as a matter of fact, NBG had not lost supervisory functions in practice, despite in 2015 Parliament approved amendments to the Law on Commercial Banks, under which finance sector supervision functions were separated from NBG and transmitted to the specially established independent agency. However, Constitutional Court annulled the mentioned decision and instituted exploring its legal capacity. Constitutional Court has not passed a due decision on the issue. Consequently, during this period the central bank of Georgia continued regulating commercial banks, microfinance organizations, insurance companies and securities market.

«At the government meeting we submitted a bill of 17 laws returning finance sector supervision functions to National Bank», Minister of Finance and first vice Prime Minister Dimitri Kumsishvili told a news conference after the February 21 government meeting.

«We know that in 2015 Parliament adopted amendments to the bills that were to transmit finance sector supervision functions to independent legal entity of public law – Financial Supervision Agency of Georgia. Then this decision was appealed to Constitutional Court. We stated several times that  finance sector supervision functions were to go back to National Bank. Therefore, we are not waiting for Constitutional Court decision and consequently, we plan to submit bills to Parliament of Georgia in its initial form that refer to finance sector supervision issues.

At the same time, I would like to note that we are conducting intense negotiations with International Monetary Fund (IMF). The IMF representatives think that the mentioned decision is also very important and positive event», Kumsishvili noted.

It is worth noting that financial supervision functions were separated from NBG in 2016. Based on bill submitted by MP Tamaz Mechiauri and Nodar Ebanoidze to the Parliament, amendments were approved to the law on national bank, under which, financial supervision service was separated  from NBG and it was shaped into an independent agency. Parliament approved four members of the agency board. The candidacies were submitted by Government. The ruling majority backed the candidacy of Eprem Urumashvili as the board member for a period of 5 years and candidacies of Ekaterine Galdava, Irakli Kovzanadze and Sasha Ternes – for a period of 7 years. The board elected Irakli Kovzanadze from its members as the board chairman. The Agency board also includes NBG President and  one  member from NBG board, who is appointed by NBG itself.

However, financial monitoring office has not operated independently. It existed on paper for a year. Currently, the case has been appealed to Constitutional Court. On October 12, 2015 before passing a final decision, Constitutional Court temporarily suspended operation of the monitoring office. As a result, before the final decision, bank sector supervision functions are still performed by National Bank of Georgia (NBG).

The appeal to the Constitutional Court was submitted by parliament’s minority.

In due time, the issue of separating financial supervision functions from NBG became the subject of confrontation. The then President of NBG Giorgi Kadagidze  also objected to this change. On July 31, 2015 President vetoed Parliament-approved bill, but the Parliament managed to overcome the veto and the President signed Mechiauri’s bill on September 10.

President’s economic advisor Giorgi Abashishvili spread information that the world’s most influential international finance institutions suggested Georgian Authorities not to separate supervisory functions from the National Bank.

IMF representative in Georgia Azim Sadikov noted that IMF was suggesting Georgian Government that it would be better  to maintain bank sector supervision functions at National Bank because of three following reasons: this decision would ensure 1) independence of supervisory function; 2)  tight relation between monetary and finance sector policies; 3) growth in fficiency of the institute   by assembling all experts of this field. Based on the aforementioned, we express our firm position that bank sector supervision must be part of National Bank.

The world practice suggests that there are powerful national banks, as major regulators, as well as independent agencies of finance sector that successfully operate. This is the issue of rather economic taste. Separation of finance sector supervision functions from central banks intensified after the 2009 global financial crisis worldwide. Government did not introduce any economic substantiation neither two years ago, when separating supervision functions from NBG, nor today, when these functions are returned back to NBG.

The fact is that in the current parliament there are 42 MPs of the previous convocation, who voted for creating an independent finance regulator. And now they plan to abolish their own decision without any explanations. To put simply, similar activity is just irresponsibility of parliament members and Government before electors.

By Merab Janiashvili
Economic Analyst
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