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A joint IMF and World Bank team conducted virtual missions to Georgia during January-February 2021 and May-June 2021, to update the findings of the Financial Sector Assessment Program (FSAP) conducted in 2014. This report summarizes the main findings of the mission, identifies key financial sector vulnerabilities and developmental issues, and provides policy recommendations.

Access To Finance --- Capital Markets and Capital Flows --- E-Finance and E-Security --- Finance and Financial Sector Development --- Financial Regulation and Supervision --- Financial Stability --- Financial Structures --- Macroprudential Policy --- Risk Assessment

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There is growing recognition that prolonged monetary policy easing of major economies can have extraterritorial spillovers, driving up financial system leverage in other countries. When faced with such a rise of threats to financial stability, what can countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preemptive or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions. In practice, however, policymakers need to remain cautious about the timing of preventative tightening, especially when their economies face large negative shocks such as a pandemic.

Macroeconomics --- Economics: General --- Exports and Imports --- Monetary Policy --- Central Banks and Their Policies --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Financial Institutions and Services: Government Policy and Regulation --- Financial Markets and the Macroeconomy --- International Investment --- Long-term Capital Movements --- Externalities --- Economic & financial crises & disasters --- Economics of specific sectors --- International economics --- Macroprudential policy --- Financial sector policy and analysis --- Spillovers --- Capital inflows --- Balance of payments --- Capital flow management --- Macroprudential policy instruments --- Currency crises --- Informal sector --- Economics --- Economic policy --- Capital movements --- International finance --- United States

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After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support. We investigate the empirical relationships between increased leverage, financial conditions, and macro-financial stability in a sample of major advanced and emerging market economies. We find that loose financial conditions contribute to leverage buildups and generate an intertemporal tradeoff: financial stability risk is lessened in the near term but exacerbated in the medium term. The tradeoff is amplified during credit booms, when debt service burdens are particularly high, or when the share of foreign currency debt is high in emerging markets. Selected macroprudential tools can arrest leverage buildups and mitigate the tradeoff.

Canada --- Macroeconomics --- Economics: General --- Money and Monetary Policy --- Banks and Banking --- Finance: General --- Monetary Policy --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Financial Markets and the Macroeconomy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Interest Rates: Determination, Term Structure, and Effects --- General Financial Markets: Government Policy and Regulation --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Banking --- Finance --- Credit booms --- Money --- Macroprudential policy --- Financial sector policy and analysis --- Central bank policy rate --- Financial services --- Macroprudential policy instruments --- Financial sector stability --- Currency crises --- Informal sector --- Economics --- Economic policy --- Credit --- Interest rates --- Financial services industry

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Since the 2015 FSAP, the NBG has significantly strengthened its institutional framework for macroprudential policy and put in place a comprehensive toolkit. Among other reforms, to strengthen the transparency of and accountability for macroprudential policy, the NBG published its Macroprudential Policy Strategy in 2019, which sets out five intermediate objectives: (i) mitigating and preventing excessive credit growth and leverage; (ii) mitigating and preventing excessive maturity mismatch and market illiquidity; (iii) limiting direct and indirect exposure concentrations; (iv) limiting the systemic impact of misaligned incentives with a view to reducing moral hazard; and (v) reducing dollarization of the financial system.

Banks and Banking --- Currencies --- Currency --- Dollarization --- Economic policy --- Finance --- Finance: General --- Financial Institutions and Services: Government Policy and Regulation --- Financial Markets and the Macroeconomy --- Financial sector policy and analysis --- Financial services industry --- Financial services law & regulation --- Foreign Exchange --- Foreign exchange --- General Financial Markets: Government Policy and Regulation --- Government and the Monetary System --- International agencies --- International Agreements and Observance --- International Economics --- International institutions --- International organization --- International Organizations --- Macroeconomics --- Macroprudential policy instruments --- Macroprudential policy --- Monetary economics --- Monetary Policy --- Monetary policy --- Monetary Systems --- Money and Monetary Policy --- Money --- Payment Systems --- Regimes --- Standards --- Georgia

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Sector-specific macroprudential regulations increase the riskiness of credit to other sectors. Using firm-level data, this paper computed the measures of the riskiness of corporate credit allocation for 29 advanced and emerging economies. Consistently across these measures, the paper finds that during credit expansions, an unexpected tightening of household-specific macroprudential tools is followed by a rise in riskier corporate lending. Quantitatively, such unexpected tightening during a period of rapid credit growth increases the riskiness of corporate credit by around 10 percent of the historical standard deviation. This result supports early policy interventions when credit vulnerabilities are still low, since sectoral leakages will be less important at this stage. Further evidence from bank lending standards surveys suggests that the leakage effects are stronger for larger firms compared to SMEs, consistent with recent evidence on the use of personal real estate as loan collateral by small firms.

Macroeconomics --- Economics: General --- Money and Monetary Policy --- Corporate Finance --- Foreign Exchange --- Informal Economy --- Underground Econom --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financial Markets and the Macroeconomy --- Corporate Finance and Governance: General --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Ownership & organization of enterprises --- Credit --- Money --- Macroprudential policy --- Financial sector policy and analysis --- Bank credit --- Macroprudential policy instruments --- Corporate sector --- Economic sectors --- Currency crises --- Informal sector --- Economics --- Economic policy --- Business enterprises --- Denmark --- Macroeconomics. --- Financial institutions --- Corporate debt. --- Economics: General. --- Money and Monetary Policy. --- Corporate Finance. --- Foreign Exchange. --- Informal Economy. --- Underground Econom. --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General. --- Financial Markets and the Macroeconomy. --- Corporate Finance and Governance: General. --- Economic & financial crises & disasters. --- Economics of specific sectors. --- Monetary economics. --- Ownership & organization of enterprises. --- Credit. --- Money. --- Macroprudential policy. --- Financial sector policy and analysis. --- Bank credit. --- Macroprudential policy instruments. --- Corporate sector. --- Economic sectors. --- Currency crises. --- Informal sector. --- Economics. --- Economic policy. --- Business enterprises. --- Government policy. --- Denmark.