On 25 June 2015, a member of the Parliamentary Majority and Chair of the Parliament’s Finance and Budget Committee, Tamaz Mechiauri, discussed the planned amendments to the Law on the National Bank of Georgia. The MP responded to the critics of the law that the separation of the supervisory function from the National Bank does not contradict the EU-Georgia Association Agenda.

FactCheck

took interest in the accuracy of Tamaz Mechiauri’s statement.

On 22 May 2015, Tamaz Mechiauri introduced a legislative initiative according to which the supervisory department is to be separated from the National Bank and established as an independent legal entity. According to the preliminary initiative, six members of the new entity will be selected by the Parliament of Georgia with the seventh member being the President of the National Bank himself. On 17 July 2015, the Parliament of Georgia adopted these amendments at the third hearing.

Tamaz Mechiauri has expressed his distrust towards the President of the National Bank and claims that he represents a threat for the country. The MP asserts that the new financial supervisory agency will use its mandate in the interests of the state and make sure to prevent speculative deals and agreements between the different structural units of the state apparatus.

The President’s Economic Adviser, Giorgi Abashishvili, has declared that the aforementioned legislative initiative contradicts both the EU-Georgia Association Agenda and the Government of Georgia’s Decree N59 of 26 January 2015. Additionally, none of the international experts of either the European Union or the European Central Bank were involved in drafting the law.

In the explanatory note to the amendments to the Law on the National Bank of Georgia we can read that the adoption of the law is necessitated to ensure the supervision of the financial sector and to establish an effective and independent institution. Further, the aim of the law is to establish an independent

organ of financial supervision at the National Bank of Georgia. According to the law, a new legal entity of public law; namely, Financial Supervision Agency of Georgia, will be established at the National Bank of Georgia. The principal responsibility of the new Agency will be to work on the financial sustainability and the transparency of the financial sector together with the protection of the rights of consumers and investors. The explanatory note also says that implementing so-called "separated and mixed bank supervision models" in Georgian legislation is recommended.

Of note is that there has been an increasing trend worldwide to unify national banks and their financial supervisory bodies under a single structure since the 2008-2009 world financial crisis. According to the assessment of financial market researchers, a separate financial supervisory agency is responsible for an individual financial institution whilst a national bank is responsible for the financial stability of the whole country. Therefore, a separate financial supervisory service which is independent from a national bank increases the risks of instability. This problem is well described in Lord Turner’s report.

The case of Latvia deserves our attention in this regard. The financial supervisory body of the country and the National Bank of Latvia have had contradictory opinions in regard to rising prices on the real estate market, for example. In the financial supervisory body’s report published in 2006, the level of the credit portfolio issued for the real estate sector and the level of that portfolio’s credit risk management overall were assessed as satisfactory. However, in the financial stability report published in the same period, the National Bank of Latvia underscored the necessity of having the banking sector’s risk management policy scrutinised and improved. The report added that this necessity is especially visible against the background of a high level of dependence upon the real estate market. As we can see, the independent financial supervisory service is focused upon private institutions and respective risks whilst the National Bank deals with a far broader spectrum of problems. If these two institutions are separated, the National Bank will be unable to use necessary measures to alleviate the identified risks because it is a competence of the financial supervisory body. Therefore, the risk of financial instability increases.

According to Article 47 of the Law on the National Bank of Georgia, the Financial Supervision Agency of Georgia will be the only governmental organ to carry out the supervision of the financial sector. According to the law, the Agency will not be subordinated to any other organ or governmental official but will be a part of the National Bank of Georgia’s single centralised system.

Additionally, the Agency will be accountable to its board and not the National Bank. The National Bank of Georgia will be responsible for providing the Agency with a respective office as well as technical and financial means.

The structure of the Financial Supervision Agency of Georgia and its activity is defined by its bylaws which will be approved by its board. As we can see, the Agency will not be accountable to the National Bank. The Agency’s board will consist of seven members. One of the members will be the President of the National Bank of Georgia, another member will be a member of the National Bank’s board and the remaining five members will be selected by the Parliament of Georgia.

Of note is that the Financial Supervision Agency of Georgia will be involved in the process of determining the minimum reserve requirement although the National Bank will maintain the right to have an independent monetary policy. The Committee of Minimum Reserve Requirement will be established and composed upon the basis of parity with the President of the National Bank having a decisive vote. Moreover, the National Bank will be in charge of conducting both the internal audit and the audit of the Agency as well as its financial reports.

The explanatory note to the Law on the National Bank of Georgia also states that the initiative corresponds with the European Union’s directives and does not contradict a single one of Georgia’s international obligations. It is underscored in the explanatory note that no international expert or organisation has participated in the drafting of this legislative initiative. Of particular mention is the information noted in the letter we received from Tamaz Mechiauri that "there were a lot of international and other organisations involved in the process of improving the Law on the National Bank of Georgia." However, the letter does not specify which international organisations were involved in the process or the level of their engagement.

According to the 2015 National Action Plan (p. 92, Article 331) for the implementation of the EU-Georgia Association Agenda, the parties will cooperate to strengthen the independence of the National Bank of Georgia by revising its legislation and sharing the experience of the European Central Bank. As we can see, according to the EU-Georgia Association Agenda, the institutional independence of the National Bank of Georgia should be strengthened with the best experience of the European Union used to this end. EU-Georgia Association Agenda includes the same clause (

p. 18).

The same position is advocated by different international financial institutions (World Bank, International Monetary Fund, European Bank for Reconstruction and Development, Asian Development Bank) which have addressed the Prime Minister and the Speaker of the Parliament with a letter

and urged them to discard the proposed amendments to the Law on the National Bank of Georgia.These institutions have argued that the separation of the supervisory functions from the National Bank and the establishment of a separate supervisory institution would diminish the independence of the National Bank and bring a set of new risks.

The European Bank for Reconstruction and Development (EBRD), together with the EU, is a principal guarantee of financial and banking sector stability in Central and Eastern Europe (EU member states own approximately 69% of the EBRD’s capital). In the letter, the EBRD expresses its critical attitude towards the planned legislative changes and calls for the Government of Georgia not to adopt the legislative amendment: "We are addressing you to express our deep concerns about the recently proposed draft amendments to the Organic Law on the National Bank of Georgia. We believe that enacting the amendments as tabled in Parliament would weaken the independence and quality of banking supervision in Georgia when the National Bank’s board was selected by the President of Georgia and was later approved by the Parliament. Instead, that will lead to a politicisation of banking supervision. There is also the risk that a new agency might be too weak to resist lobbying by the banking sector for weaker regulation which would threaten financial sector stability."

Conclusion

The President of Georgia’s Administration, international financial organisations and different economic experts have strongly criticised the aforementioned legislative initiative. Influential international financial institutions have addressed the Prime Minister and the Speaker of the Parliament with a critical letter and urged them to protect the independence of the country’s National Bank. Of special note is that the European Bank for Reconstruction and Development offered a sharply negative assessment of the proposed amendments.

Even though the financial supervisory service will remain a part of the centralised system of the National Bank of Georgia, it will still be an independent institution and have the responsibility for taking a part of the competence of the National Bank. According to the legislative initiative, the new Financial Supervision Agency of Georgia will have high institutional independence and not succumb to the influence of any organisation or individual. Moreover, the Agency will be accountable to its board instead of to the National Bank itself.

The legislative initiative contradicts the EU-Georgia Association Agenda. According to the Action Plan, approved by the Government of Georgia, the implementation of the Association Agreement envisages the strengthening of the institutional independence of the National Bank. In the case if any new regulations are expected to be enacted in this field, the European Union offers its own experience and the involvement of EU experts during the drafting process of the law. As we can see, the representatives of the European Union were not involved in the drafting process of the Law on the National Bank of Georgia.

FactCheck concludes that Tamaz Mechiauri’s statement is FALSE.

Editor’s Note: The initial version of this article was published on 17 July 2015. After the publication, FactCheck was contacted by a representative of the European Union Delegation to Georgia who pointed out a certain inaccuracy. In the letter, it was explained that our article analysed the Association Agenda and the Action Plan whilst the title of the article mentioned the Association Agreement. We accepted the EU Delegation’s comment and amended the respective parts of the article. However, FactCheck’s verdict remains the same.