Georgian banks to be controlled by agency, not central bank

Georgian parliament passes controversial regulation bill, which annuls responsibility of central bank to supervise financial institutions

Photo by: AA
Photo by: AA

Updated Jul 28, 2015

The Georgian parliament on Friday passed a bill that would strip the central bank of its supervisory functions over banks, a move critics say could erode its independence.

The proposed law, which was passed by 80 votes to 19 and would transfer banking supervision to a separate agency, has been criticised by international financial institutions, business associations, opposition parties and civil society groups.

President Georgy Margvelashvili has indicated he would veto it, although the ruling coalition can overturn his veto as it holds a majority in the parliament.

The new agency would be in charge of monitoring and oversight of the banking sector and other financial institutions, functions currently carried out by the central bank.

The agency is expected to be governed by a seven-member board, where the central bank's president and one other member of its board would take two seats. Five other seats would be occupied by candidates nominated by the government and confirmed by the parliament.

Senior politicians in the ruling Georgian Dream coalition have criticised central bank chief Georgy Kadagidze, the only high-ranking official left from the administration of former president Mikheil Saakashvili.

The government denies the proposal is politically motivated.

The former Soviet republic's economy has been battered by a plunge in the Russian rouble and the conflict in Ukraine. Declining foreign investment and lower exports and remittances are also contributing to a rising current account deficit.

"Such an experiment can seriously harm the banking sector, as well as the stability of the financial system," said David Onoprishvili, an opposition member of parliament.

The International Monetary Fund, European Bank for Reconstruction and Development, Asian Development Bank and World Bank have called on Georgia to keep banking supervision inside the central bank.

"We believe that enacting the amendments ... would weaken the independence and quality of banking supervision in Georgia, threaten banking sector stability, and undermine prospects for sustained growth," the institutions said in a letter to the prime minister and parliamentary speaker.