When a commercial bank falls into serious difficulty and ordinary supervisory measures no longer suffice, a special resolution mechanism comes into play for the National Bank — a purpose-driven recovery procedure instead of bankruptcy or chaotic liquidation. The Organic Law on the National Bank defines the objectives of resolution, the Bank's resolution powers, the rules on temporary state financing and the resolution fund, and the institutional framework for crisis preparedness. On this page we explain every key element of this mechanism.
What resolution is and what its objectives are
The National Bank, directly or through a special manager, carries out the resolution of a licensed commercial bank in Georgia and of a branch of a foreign bank. In the resolution process the Bank is guided by five objectives of equal weight: ensuring the continuity of the commercial bank's critical functions; avoiding a significant negative impact on the stability of the financial system; protecting budgetary and state funds; protecting insured deposits in accordance with the law on the deposit insurance system; and protecting consumers' funds and assets. The list or criteria of critical functions are determined by a legal act of the National Bank. The Bank takes all measures to achieve these objectives in light of the specific circumstances of each case and, as far as possible, ensures that resolution costs and creditors' losses are minimized.
The National Bank's resolution powers
After deciding to introduce the resolution regime, the Bank exercises all the powers necessary to achieve the resolution objectives. It takes the bank under full control — the full powers of all organs of the commercial bank pass to it; it values the bank's assets and liabilities; it dismisses employees and appoints others in their place; it may suspend any operation, transaction or other activity of the bank; it may temporarily introduce a moratorium on the bank's due obligations and restrict a party's ability to exercise early termination of a qualified financial contract; and it may apply to the court requesting the stay of proceedings concerning the bank.
Among the restructuring instruments, the Bank may: effect the merger of the bank with another bank or transfer the bank's shares to another person; transfer assets and liabilities, wholly or partly, to a third party — in doing so the Bank must ensure that deposits are transferred only to another commercial bank or a bridge bank; carry out the write-down of shares and other regulatory capital instruments or their conversion into ordinary shares; require the issue of new shares; write down liabilities or convert them into ordinary shares or other ownership instruments; terminate any contract concluded by the bank, including by set-off, including derivative contracts; cancel debt instruments issued by the bank or modify their maturity, interest rate or payment periodicity — except for secured obligations, including obligations to creditors of a programme under the law on covered bonds. The Bank may also claim damages from the shareholder, administrator or employee whose action caused damage to the bank, and may challenge in court an action or transaction carried out within one year before the introduction of the resolution regime where, as a result, a connected person obtained a property benefit at the bank's expense or enjoyed a preference to the detriment of the bank and its creditors.
Temporary state financing and the resolution fund
To finance the resolution process the Ministry of Finance of Georgia grants temporary state financing if this is necessary to ensure the stability of the financial system, the funds accumulated in the resolution fund from the pre-contributions of licensed banks and branches of foreign banks are insufficient, and financing from non-state sources cannot be found or is insufficient. Such financing is granted only after the shareholders and the creditors specified by law have taken the first loss in the reverse order of the liquidation priority of claims. The resolution fund account is opened by the National Bank — the fund is the financial basis for the effective conduct of the resolution process.
Crisis preparedness and crisis management
To promote the stable functioning of the financial system, an Interagency Committee on Financial Stability is created, responsible for developing mechanisms for managing crisis situations and a financial crisis. Its members are the Minister of Finance, the President of the National Bank, the Head of the Deposit Insurance Agency and the Head of the State Insurance Supervision Service; the committee is chaired and represented by the Minister of Finance. The committee meets at least once a year or at the request of the National Bank; its secretariat is the National Bank. The Bank must inform the committee of potential threats to financial stability and promptly notify it of the need for a bank's resolution, temporary state financing or a lender-of-last-resort loan. The committee's annual report is published together with the National Bank's annual report.
A covered-bond issuing bank in resolution
Where a commercial bank in resolution or liquidation is at the same time an issuer of covered bonds or a debtor of the refinancing bank, the resolution or liquidation process in respect of it is conducted taking into account the special provisions of the law on covered bonds. This means that when managing the crisis of such a bank, particular attention is devoted to the programmes financed by covered bonds and to their creditors.
Lender of last resort and the Resolution Committee
In addition to ordinary loans, the National Bank may grant a lender-of-last-resort loan to a commercial bank and a microbank. The term of such a loan must not exceed three months, the interest rate must be higher than the rates set for ordinary loans, and it must be secured by assets determined by the National Bank's Council. This instrument is designed as the ultimate means of supporting a bank at a time of acute liquidity problems.
Within the National Bank, resolution matters are considered by the Bank's Resolution Committee, established by an order of the Bank's President. Its members are the President and the vice-presidents of the National Bank, and only they have the right to vote in decision-making; the committee is chaired by the President. Meetings may be attended by other staff and invited persons where their attendance is necessary for an informed decision. The composition and rules of procedure of the committee are determined by a legal act of the Bank's President.