This paper discusses key findings of the assessment of Financial Sector Supervision and Regulation in Andorra. The assessment reveals that bank supervision in Andorra is broadly sound and has improved since the 2002 assessment. Institut Nacional Andorrà de Finances’ (INAF) new charter strengthened its independence and remedial powers. But these could be further strengthened by empowering it to impose all types of sanctions. Developing INAF’s onsite supervisory capacity and clarifying its requests to external auditors will be important for the bank and nonbank financial sectors.
Andorra’s large banking sector (with assets equal to 600 percent of GDP and assets under management—largely off-balance sheet—nearly 23 times the GDP), which is dominated by private banking, is a key feature of the economy. The aim of this paper is to systematically analyze its main features. Building on key stylized facts and cross-country comparisons, the paper discusses the implications of the business model of Andorran banks and the associated vulnerabilities, particularly those related to the reliance on foreign funding, the focus on private banking, and the use of internationalization to grow and remain competitive. These vulnerabilities and the exposure to risks calls for continued vigilance and strong supervision.