Georgia: Banking & Finance (2nd edition)

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This country-specific Q&A provides an overview to banking and finance laws and regulations that may occur in Georgia.

This Q&A is part of the global guide to Banking & Finance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance-2nd-edition/

  1. What are the national authorities for banking regulation, supervision and resolution in your jurisdiction?

    National Bank of Georgia (the “NBG”) is the national authority for banking regulation, supervision and resolution.

  2. Which type of activities trigger the requirement of a banking license?

    According to Article 2.2 of Law of Georgia on the Activities of Commercial Banks, taking deposits and using them for granting credits trigger the requirement for the banking license.

  3. Does your regulatory regime know different licenses for different banking services?

    No, under Georgian law, only one type of banking license exists.

  4. Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?

    Yes, pursuant to Article 20 of Law of Georgia on the Activities of Commercial Banks, the banking license permits:

    (a) Selling and purchasing monetary instruments, including cheques, bills of exchange and depositary certificates, securities, debt instruments or interest rates of futures and options, currency and interest rate instruments, debt documents, foreign currency, precious metals, and gems, with its own and customers‘ funds;

    (b) performing monetary and non-monetary payment transactions and cash-collection services;

    (c) issuing means of payment and organising their circulation (including payment cards, cheques, and bank bills);

    (d) providing interest-free banking services;

    (e) rendering intermediary services in financial markets;

    (f) performing fiduciary (trust) transactions, soliciting and placing funds by order of customers;

    (g) storing and registering valuables, including securities;

    (h) providing credit reference services;

    (i) central depositary activities under the Law of Georgia on Securities Markets;

    (j) leasing property; (subject to restrictions under the law)

    (k) providing payment services, operating payment system, performing the functions of a paying agent;

    (l) providing services related to all of the above activities.

  5. Is there a “sandbox” or “license light” for specific activities?

    No.

  6. Are there specific restrictions with respect to the issuance or custody of crypto currencies, such as a regulatory or voluntary moratorium?

    No.

  7. What is the general application process for bank licenses and what is the average timing?

    A banking license is issued by the National Bank of Georgia on the basis of an application from the relevant legal entity.

    The following Information and documents shall be submitted to NBG for acquiring a banking license:

    a) Application Form filled out by the applicant;

    b) Incorporation Documents:

    • Articles of Incorporation (Charter);
    • Extract from the corporate registry;
    • Minutes of the First Meeting of Shareholders (founders of the Bank);
    • Minutes of the First Meeting of Supervisory Board and Board of Directors.

    All incorporation documents of the applicant shall be originals or certified copies (in case of foreign documents, they need to be apostilled or legalized, depending on country of origin);

    c) Information about stated share capital and paid off share capital; information about ownership and origin of sources of Bank’s stated share capital and supervisory capital;

    d) The bank statement certifying the payment of minimum amount of share capital;

    e) Information certifying that Administrators of the Bank are in compliance with the Administrator Compliance Requirements established by NBG;

    f) Filled out Compliance Declaration(s) about the owners (direct and beneficial owners) of a considerable amount of shares of the Bank;

    g) Information about ownership structure/group of the applicant in the form established by the law;

    h) Information about the Supervisory Board, Audit Committee and Board of Directors of the applicant;

    i) Internal By-laws and Regulations approved by the Supervisory Board of the Bank;

    j) Business Plan of the Bank approved pursuant to the Charter of the Bank;

    k) Documents that certify the ownership or possession of the real estate property, where the Bank shall be located;

    l) Information about other financial resources, about the location of the central branch and other branches of the Bank;

    m) Document certifying payment of the licensing fee;

    n) In case of a subsidiary/branch of a foreign bank – the financial statements of the parent company for the previous 3 years, the decision of the supervisory board of the parent bank on applying to NBG for banking license, the confirmation of the supervising entity of the parent bank on the establishment of the subsidiary/branch in Georgia;

    o) Any other information/document which might be requested by the National Bank of Georgia in each particular case.
    The decision shall be made within 3 months from the date of application. The decision shall be communicated with the applicant in a written form.

    Banking activities shall be launched within 6 months from the date of license issuance. Otherwise, banking license expires.

  8. Is mere cross-border activity permissible? If yes, what are the requirements?

    No. However, the Law of Georgia on the Activities of Commercial Banks provides simplified procedures for obtaining a banking license by the branch/subsidiary of a reputable foreign bank defined by Geor-gian law.

  9. What legal entities can operate as banks? What legal forms are generally used to operate as banks?

    Pursuant to Article 2.1 of the Law of Georgia on the Activities of Commercial Banks, only a joint stock company established under Georgian law can operate as a bank.

  10. What are the organizational requirements for banks, including with respect to corporate governance?

    Under the Law of Georgia on the Activities of Commercial Banks, the highest governing body of the bank shall be the meeting of the shareholders. The meeting of the shareholders shall elect the superviso-ry board. The supervisory board shall consist of at least 3 and no more than 21 members. The manage-ment and representative authorities are vested upon the directors of the commercial bank. The board of directors shall consist of at least three members. The law establishes eligibility criteria for the members of the supervisory board and the board of directors.

    The National Bank of Georgia has recently introduced the Corporate Governance Code for the Commer-cial Banks (approved by the Decree №215/04 of the President of the National Bank of Georgia, dated 26 September, 2018) establishing detailed corporate governance rules for the banks.

    According to Article 3.2 of the Code, a bank should have a well-defined organizational structure, which ensures allocation of responsibilities, effective identification of risks, management/monitoring and reporting procedures, adequate internal control mechanisms, including robust administrative and accounting procedures, effective IT systems and controls for risk management, remuneration policies/procedures. This shall be subject to regular internal review and update.

    According to Article 7.1 of the Code, each bank, regardless its size, complexity and the scope of business, is required to establish at least audit and risk committees composed of supervisory board members. Under Article 7.2 of the Code, without prejudice to the first paragraph of Article 7, systemically important banks are required to establish remuneration and corporate governance committees. Furthermore, pursuant to Article 7.3 of the Code, it is highly recommended to establish other specialized committees for the purposes of enhancing the effectiveness of supervisory board performance. Moreover, the NBG might require a commercial bank to establish additional committee(s) considering bank’s systemic importance, risk profile, complexity and specificity.

  11. Do any restrictions on remuneration policies apply?

    Article 19 of the Corporate Governance Code for the Commercial Banks approved by the Decree №215/04 of the President of the National Bank of Georgia introduces restrictions on remuneration poli-cies. In particular, the bank’s remuneration structure should support sound corporate governance and risk management incentivizing good performance, acceptable risk-taking behavior, reinforcing the bank operating and risk culture that should be in line with the business and risk strategy, objectives, values and long-term interests of the bank. Remuneration Policy must ensure that the structure of the remuneration of control function personnel, including performance-based components, if any, does not compromise the independence of this personnel in carrying out their functions. For the purposes of ensuring the independence of control functions, the remuneration of staff should not be based on financial results of the business line they oversee or monitor.

    The code provides specific restrictions with respect to remuneration of the supervisory board, the board of directors and the staff. The restrictions, inter alia, include the following:

    • Incentives embedded within remuneration structures should not incentivize staff to take excessive risk.
    • Remuneration of supervisory board members should only include fixed compensation.
    • The difference between the compensation of the board members, which are members of committees, or chairs or deputy chairs, and other board members, who do not hold such positions, should not be more than 30%.
    • Remuneration system for the directors and other material risk takers should include at least: a) fixed remuneration, which should primarily reflect relevant professional experience and organizational responsibility; and b) variable remuneration, which should reflect risk-adjusted performance.
    • Remuneration for the directors and other material risk takers should depend on the whole year’s results.
  12. Has your jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?

    Yes, the National Bank of Georgia has implemented the major requirements of Basel III framework with respect to regulatory capital which are set out in the By-law on the Requirements with respect to Capital Adequacy of Commercial Banks approved by the Decree N100/04 of the President of the National Bank of Georgia. There are no major deviations, e.g., with respect to certain categories of banks. According to Article 1.4 of the By-law, the rules under the By-law are based on the Basel framework and in case any rule or definition is not provided by the By-law, the bank shall adhere to the standards established by the Basel Committee, regulation (EU) 575/2013 and directive (EU) 2013/36.

  13. Are there any requirements with respect to the leverage ratio?

    Yes, the requirements with respect to the leverage ratio were introduced the By-law on the Requirements of Leverage Ratio for Commercial Bank approved by the Decree N214/04 of the President of the National Bank of Georgia. According to Article 1.3 of the By-law, the rules under the By-law are based on the Basel framework and in case any rule or definition is not provided by the By-law, the bank shall adhere to the standards established by the Basel Committee, regulation (EU) 575/2013 and directive (EU) 2013/36. Under Article 3.4 of the By-law, the leverage ratio of the bank shall always exceed 5% unless the law or the National Bank of Georgia establishes the requirement of an individual leverage coefficient for the bank.

  14. What liquidity requirements apply? Has your jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?

    The By-law on the Liquidity Coverage Ratio of commercial banks approved by the Decree N70/04 of the President of the National Bank establishes the liquidity requirement LCR. Under Article 3.3 of the By-law, in the absence of a situation of financial stress, LCR for the aggregated amount of all currencies shall not be lower than 100%. In addition, the liquidity coverage ratio in the specific foreign currency shall not be lower than 100% and in the national currency - lower than 75%. Under to Article 1.2 of the By-law, in case any rule or definition is not provided by the By-law, the bank shall adhere to the standards established by the Basel Committee on Banking Supervision and other internationally established standards with a prior agreement with the National Bank of Georgia.

    The National Bank of Georgia has elaborated the draft By-law on the Net Stable Funding Ratio (NSFR) but has not approved it yet. According to the draft, the NSFR shall not be lower than 100%. If the bank anticipates that the coefficient may be lower than 100%, the bank shall present the improvement plan and the NBG shall review it during taking the respective supervisory action.

  15. Do banks have to publish their financial statements? Is there interim reporting and, if so, in which intervals?

    Under Article 26.1 of the Law of Georgia on the Activities of the Commercial, Banks and their subsidiaries shall regularly prepare reports, records, and annual financial statements according to International Accounting Standards.

    In addition, the Decree №92/04 of the President of the National Bank of Georgia sets forth the disclosure requirements for commercial banks within Pillar 3. Under Article 3.1 of the decree, Pillar 3 disclosure requirements incorporate qualitative and quantitative information related to capital adequacy, corporate governance and risk management. Pursuant to Article 3.4 of the decree, quarterly and annual Pillar 3 reports shall be published in Georgian and in English languages on the official websites of the bank and NBG and certain information shall be also published in print media. The decree specifies the information that shall be included in the quarterly and annual Pillar 3 reports.

  16. Does consolidated supervision of a bank exist in your jurisdiction? If so, what are the consequences?

    Yes, pursuant to Article 2 of Organic Law of Georgia on National Bank, the Consolidated Supervision is the supervision process which encompasses the imposition of the supervisory requirements and carrying out supervisory authorities/activities with respect to the any member of the banking group individually and/or with the members of the banking group (jointly) for the purposes of stability of the banking sector and the enhancement of the supervisory process of the commercial bank(s) being the members of the banking group.

  17. What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?

    Under Article 3.10 of the Law of Georgia on the Activities of Commercial Banks, the commercial bank shall agree in advance with National Bank of Georgia about any changes in the structure of the share-holding in accordance with the rule established by the National Bank.

    Under Article 83 of Law of Georgia on the Activities of Commercial Banks, on the basis of available in-formation, a commercial bank shall provide the National Bank, together with annual reports, with infor-mation on the direct owner and the beneficial owner of more than 10% of bank shares and shall indicate whether it confirms the accuracy of the information provided. A beneficial owner, who directly or indirect-ly holds more than 10% of commercial bank shares, shall be obliged to submit to the National Bank in April of every year a declaration as of December of the previous year. If a direct owner and a beneficial owner of significant shares of a commercial bank fail to submit the required information to the National bank, they shall be held liable for the failure under the legislation of Georgia.

    In addition, pursuant to Article 10.3 of Law of Georgia on the Activities of the Commercial Bank, a com-mercial bank shall be obliged to have complete information about the identity of each beneficial owner of the bank who directly or indirectly owns more than 10% of shares (indicating the number of shares); to provide the National Bank with that information, as well as with information of any significant changes regarding a beneficial owner, and to publish this information in the bank's annual reports. The National Bank shall define the method of providing and publishing this information on the basis of International Financial Reporting Standards and best international practices. According to Article 10.4 of Law of Georgia on the Activities of the Commercial Bank, the obligation under the third paragraph of this article shall not apply to beneficial owners of a commercial bank who cannot be identified by the bank because the nominal ownership in their favor is held by a clearing organizations located and exercising their au-thority in developed countries, or by international depositaries. Article 10.5 of Law of Georgia on the Activities of the Commercial Bank defines that for the purposes of this Law, the requirements that apply to the partners (shareholders) of a commercial bank shall also apply to beneficial owners who directly or indirectly hold shares in the commercial bank.

  18. Does your regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?

    Yes, under Article 5 of Law of Georgia on the Activities of Commercial Banks, a person may not be a holder of significant shares of a commercial bank if he/she has criminal records for a serious or particu-larly serious crime, or for financing terrorism, and/or legalising illicit income, or for other economic crimes.

  19. Are there specific restrictions on foreign shareholdings in banks?

    No.

  20. Is there a special regime for domestic and/or globally systemically important banks?

    Yes, the Decree N174/04 of the President of National Bank of Georgia determines the domestic systemi-cally important commercial banks and establishes systemic buffers for them. In addition, the By-law on the Requirements of Capital Adequacy and the Corporate Governance Code for the Commercial Banks provide special rules and requirements for systemically important banks.

  21. What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?

    Pursuant to Article 30 of the Law of Georgia on the Activities of Commercial Banks, the National Bank of Georgia can apply the following sanctions in case of violation of banking regulations in accordance with the rules established by the law:

    a) send a written notice of warning;

    b) determine special measures or issue an instruction (guideline);

    c) impose a financial penalty;

    d) enforce payment of a financial penalty;

    e) suspend the administrator’s right of signature and demand a commercial bank’s Supervisory Board to temporarily remove or dismiss him/her from office;

    f) demand a commercial bank’s supervisory board and board of directors to convene an extraor-dinary general meeting of shareholders to discuss violations and to take necessary measures for their correction;

    g) suspend or restrict a commercial bank from increasing assets, distributing profits, paying divi-dends and bonuses, increasing salaries and soliciting deposits;

    h) in special cases, when interests of commercial bank depositors or other creditors are endan-gered, suspend active operations of the bank, and impose provisional administration;

    i) demand that controlling persons of a commercial bank cancel or restrict control if the bank fails to provide the National Bank with financial or other information, or any violation is detected;

    k) revoke the banking license of a commercial bank.

  22. What is the resolution regime for banks?

    According to the Organic Law of Georgia on National Bank, the National Bank is entitled to establish the rules relating to temporary administration of the bank (Article 49.1).

    The Rules on the Adoption of the Temporary Administration Regime in the Commercial Banks approved by the Decree N 173/04 of the President of the National Bank introduces detailed rules on the temporary administration of the commercial banks which have or may be have significant financial problems or which are insolvent or which may threaten the stability of the bank or the banking sector, the interests of the depositors and creditors of the bank due to the weak risk management model and unhealthy practices.

    During the Temporary Administration Regime, the authorities of all governing bodies of the bank shall be transferred to the temporary administrator. The temporary administrator is entitled to take all necessary measures required for the improvement of the financial condition of the commercial banks, including to sell or close the branches, representative offices and divisions of the bank, removing the staff from the held positions, making payments or suspension of payments. The temporary administrator is also enti-tled to merge the bank with another bank, to renew the capital or to sell the assets and liabilities of the bank to another bank. The temporary administrator is also entitled to block any amounts of individuals or legal entities in the banks for the period of temporary administration provided that it will take the neces-sary measures to maintain the stability thereof, unless it contradicts the requirements of Law of Georgian on Payment System and Payment Services.

  23. How are client’s assets and cash deposits protected?

    Under the Law of Georgia on Deposit Insurance System, in case of insurance event, each individual depositor is entitled to receive compensation from the Deposit Insurance Agency, up to the maximum insured amount of 5,000 GEL, regardless of the number of deposit accounts kept in each individual bank operating in the territory of Georgia. According to the law, the insurance event shall be the commencement of liquidation, insolvency or bankruptcy procedures against the commercial bank in accordance with the Law of Georgia on the Activities of Commercial Banks.

  24. Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?

    No.

  25. Is there a requirement for banks to hold gone concern capital (“TLAC”)?

    No.

  26. In your view, what are the recent trends in bank regulation in your jurisdiction?

    The recent trends in bank regulation move towards the implementation of the EU regulations and direc-tives into Georgian legislation.

  27. What do you believe to be the biggest threat to the success of the financial sector in your jurisdiction?

    Adoption of excessive regulations targeted at larger financial institutions in more developed markets may threaten the success and growth of the Georgian financial sector.