CHALLENGES OF COMPLIANCE RISK MANAGEMENT IN THE GEORGIAN BANKING SECTOR

Abstract

Risk management in the financial sector has increasingly expanded to include non-financial risks, especially compliance risk, due to complex regulatory environments and rising expectations on institutions. However, in Georgia, compliance risk remains underexplored. There is a notable scarcity of academic research examining how compliance risk is defined, regulated, assessed, and managed within the country’s banking sector. This gap hinders both theoretical insight and practical progress in enhancing the regulatory framework and institutional practices.

Building upon this context, the study seeks to analyze Georgia’s national regulatory framework, its international obligations, and current practices in the banking sector related to compliance risk management. Accordingly, the study aims to identify potential deficiencies in both the scope of the regulator’s mandate and the implementation of established regulatory requirements by commercial banks.

This research adopts a qualitative empirical approach grounded in document analysis, drawing upon existing reports, regulations, and policy documents as primary sources of real-world data. The methodology includes case studies and comparative analysis techniques to highlight key differences and uncover shortcomings. The document analysis encompasses the national regulatory framework, standards, and guidelines issued by internationally recognized organizations, relevant academic literature, and other pertinent sources, along with publicly available financial and managerial disclosures of commercial banks operating in Georgia.

Although a formal regulatory structure is in place, significant challenges remain in its effective implementation. As the findings demonstrate, gaps exist within local regulations, and banks often fail to comply due to the absence of detailed guidance, such as manuals and instructions, as well as weak enforcement mechanisms on the part of the supervisory authority. To accurately assess rising compliance risk levels within banks and understand their quantitative impact on profit, loss, and capital, the regulator must establish clear compliance risk management guidelines, including a defined risk assessment methodology.