Appendix I. History of the Andorran Banking System

Source: Institut Nacional Andorra de Finances.

Appendix II. Follow up of Implementation of Recommendations Contained in the 2002

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Appendix III. Reports on the Observance of Standards and Codes

Summary Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision


49. The assessment of Observance with the Basel Core Principles for Effective Banking Supervision is based on the Core Principles Methodology (Basel Committee on Banking Supervision, October 1999). The assessors benefited from the full cooperation of the authorities and received all necessary information. Their cooperation is gratefully acknowledged.

50. The assessment is based on the following sources: (i) the legal and regulatory framework, contained mainly in the four laws applicable to all financial institutions and the directives issued by the INAF; (ii) the self-assessment of compliance with the Core Principles as of August 2006 prepared by the INAF; (iii) the 2002 BCP assessment conducted by the IMF in the context of the assessment of Andorra’s financial system; (iv) external audit reports, including a sample of Complementary Reports15; (v) various reports prepared by INAF; and (vi) extensive discussions with the senior and supervisory staff of the INAF, as well as meetings with bankers, external auditors and other market participants.

Preconditions for effective banking supervision

51. The preconditions for effective banking supervision in Andorra are generally in place. There are no identifiable macroeconomic vulnerabilities and risks that could have implications for the structure and financial performance of the banking industry or the effectiveness of prudential safeguards or the stability of the financial system. The public infrastructure provides for an environment that fosters the honoring and enforcement of financial contracts.

52. The small size of the local economy facilitates assessment of credit risk in the loan portfolio, and the absence of a credit bureau does not seem to have affected loan evaluation, as evidenced by the low level of past due loans (about 0.2 percent of total loans in 2005). Nevertheless, the authorities have mentioned their intentions of working with the industry toward the implementation of a credit bureau. While there is no public registry in Andorra, the notaries perform the task of recording liens on real estate and other property suitable for collateral. The court system is effective and efficient, and the execution of collateral reportedly takes less than one year.

53. The flow of information on banking institutions to market participants is considered adequate, albeit disclosure of higher frequency data would be desirable. While there is no publicly available official information on the financial strength and performance of the banking industry, banks publish their annual audited financial statements both electronically and in printed form, and the ABA publishes an annual report, which contains a section on the financial environment including financial indicators of individual banks and the banking system.

54. There are no official accounting standards in Andorra, except the chart of accounts of the financial system issued by the INAF in 1999. These standards, inspired by the BE accounting standards of that time, are generally adequate but an updating is warranted in the context of IFRS. The authorities are preparing a draft accounting law by which all Andorran companies would adopt standards consistent with IFRS, with implementation estimated by 2008. The INAF is in favor of all banks adopting IFRS. The aim would be to adopt and implement IFRS in all banks as soon as draft legislation is passed by the CG and to adapt prudential regulations as needed to narrow the accounting choices available for banks.

55. Andorra has a legal and regulatory framework with flexible power for the government to effect a resolution of problem banks. Nevertheless, an immediate challenge for the authorities is to carry out modifications to the current regulation to empower the INAF as the only authority in Andorra to undertake all types of remedial actions, including the revocation of a bank’s license.

56. There is no deposit insurance in place nor is there a lender of last resort. However, all banks are required to participate in a guarantee fund. The funds are deposited in banks, and would be available to facilitate resolution of a troubled financial institution. Whether and how the fund could be used in the event that there were a problem with one of Andorra’s banks has not been defined. In the medium term, the authorities foresee the implementation of a fully defined deposit and investments insurance fund.

Main findings

57. Andorra has a high level of compliance with the BCP. Andorra is compliant with 21 principles and largely compliant with 8 principles. The only principle that is still materially noncompliant is principle 25, on the supervision of foreign bank establishments. The following summarizes the main findings of the detailed assessment of compliance with the BCP:

Objectives, Autonomy, Powers, and Resources (CP 1)

58. INAF is the Authority of the Andorran financial system and promotes and sees to the proper working and stability of the financial system. Under its charter, INAF has operational and budgetary independence and the authority to issue regulations that provide a framework of prudential standards that banks must meet. It has disciplinary and sanctioning powers over the institutions integrated in the financial system, with the exception of the most serious sanctions, which are issued by the government,16 with prior opinion of INAF. Similarly, the government has the final power to authorize and revoke banking licenses, with prior opinion of INAF. There is no evidence of government interference and, reportedly, the government has always followed INAF’s advise. INAF is funded by the revenues derived from investment income of a fund provided for by the Andorran government and by additional government budget resources, if needed. It is recommended that the powers to impose all sanctions, and to authorize and revoke a banking license, be granted to the INAF solely.

59. The supervisory agency and its staff have good credibility based on their professionalism and integrity. The legal protection of INAF employees is the same as that available to all officials, civil servants, and agents under employ of the government. Generally, the administration is held liable for the actions of its employees, including INAF employees, when they are acting in an official capacity.

Licensing and Structure (CPs 2–5)

60. The term bank is clearly defined in the law, along with the operations and services that may be provided by banking institutions supervised by the INAF. The 1998 Law regulating the creation of new banking institutions establishes the criteria and the requirements for new banking licenses. The final decision to approve or withdraw licenses is taken by the government, based on the analysis and recommendations of the INAF. From a supervisory point of view, being that INAF is the institution that will supervise the new bank, it would be more appropriate if the final decision in the licensing process is made by the supervisory authority instead of the Minister of Finance.

61. Regulation has a clear definition of qualified ownership and requires the INAF approval in any change in ownership of a bank to be valid. The INAF has the power to obtain information on individuals and legal entities that purchase stock of a banking institution at any amount. There are no bearer shares. Article 18 of the Bank Administration Law gives the INAF the powers to deny authorization to become a shareholder to any individual or to the shareholders of any legal entity. Regulation sets the criteria and various types of limits on investments that banking institutions may carry out in relation to their own capital and in relation to the capital of the nonfinancial institutions.

Prudential Regulations and Requirements (CPs 6–15)

62. Prudential regulation and requirements are considered adequate and the INAF is legally empowered to enforce them. Capital requirements in Andorra are consistent with the Basel Capital Accord. A minimum capital ratio of 10 percent is required on a solo and a consolidated basis, and there are capital requirements to cover market risks.

63. The INAF has the authority to assess credit granting and investment policies and procedures. The Chart of Accounts states that banks subject to credit risk must charge the profit and loss account with the necessary general or specific loan loss provisions. It also defines the classification of loans and provisioning in four categories. There is quarterly reporting on the quality and composition of the loan and investment portfolios and information of collaterals for off-site credit analysis. The definition of “related group” is included in the Chart of Accounts. Banks must avoid risk concentration exposures and there is a limit of 15 percent of bank capital over any kind of exposure with members of the Board of Directors. Banks are required to report quarterly on concentration limits and related party exposures on a consolidated basis. Banks must comply with the principles and guidelines set in the Ethic Code, which include a requirement to issue internal procedures to be followed by bank staff and representatives when carrying out their own operations. However, there is no explicit mention that bank’s credits to insiders and related interests should not be granted at preferential rates, and that these operations require Board approval. INAF relies on the external auditors for on-site verification, through an annual complementary report.

64. INAF has issued requirements for the management of country, transfer, market, liquidity, interest rate and foreign exchange risks. There are reporting requirements that allow INAF to conduct an off-site analysis of these risks, but INAF relies on external auditors for the on-site verification. In the case of operational risk, external auditors are required to evaluate banks’ policies and practices and report to INAF in the annual complementary report. The external auditors are required to assess the adequacy of the internal audit function and are responsible for reviewing that policies and procedures established by management of the bank are complied with, and whether the existing policies, practices and controls are sufficient and appropriate for the bank’s business.

Methods of Ongoing Supervision (CPs16–20)

65. INAF’s supervision of the financial sector consists of off-site compilation and analysis of quarterly data submitted by financial institutions in accordance with the Chart of Accounts. Information is submitted on a solo and a consolidated basis. INAF has not conducted its own on-site examinations since its creation in 1989, and has relied on the on-site work of external auditors for the validation of information, compliance with prudential requirements and assessment of internal controls and risk management. The supervisors conduct a tripartite annual meeting with each individual bank and the bank’s external auditors to discuss, among other aspects, the developments in the financial institution, the extent of its risks, its compliance with the laws and regulations and the scope of complementary audits. In addition, INAF’s officers and supervisory staff have formal and informal communications with bank managers, directors and bank association leaders during the year to discuss the condition and risks affecting their institution.

66. INAF’s staff is very lean (12 staff members) and management should take steps to gradually increase the number of its supervisors in order to be able to conduct on-site inspections of the financial institutions with its own supervisory staff, thus placing less reliance on the external audit firms to conduct complementary audits on its behalf. In the meantime, to ensure that external auditors provide an effective support for bank supervision, INAF needs to clarify the requirements for the complementary reports.

Information Requirements (CP 21)

67. Accounting standards in Andorra are satisfactory though they may require updating in some aspects such as the accounting for derivatives which are currently reported as off balance sheet items. According to the MF, proposed legislation to be adopted in the near future would mandate the adoption of international accounting standards.

Formal Powers of Supervisors (CP 22)

68. The INAF has a wide range of powers to bring about corrective actions for non-compliance with laws and regulation. It has the authority to impose sanctions upon banks in accordance with the seriousness of the transgression committed. These sanctions include fines applied to the bank or to the staff responsible; suspension, dismissal or disqualification of the bank’s board members or staff responsible; prohibition from distributing dividends; among other type of disciplinary measures. The sanctions in the category of “very severe” related to the compliance of solvency, liquidity, concentration risk, among other prudential regulation, that currently are within the authority of the government, should be within the jurisdiction of the INAF.

Cross-Border Banking (CPs 23–25)

69. The cross border operations of Andorran banks are few (Bahamas, Panama, and Uruguay) and represent a very small share of the business of the banking groups. Nevertheless, the INAF ensures the adequacy of the bank’s overall condition through the analysis of quarterly consolidated financial reports provided by banks, which include financial information of subsidiaries; and through the evaluation made by the external auditors on this respect and on risk management. Banks are required to inform the INAF before the establishment abroad of foreign branches and subsidiaries, and INAF has the authority to deny the constitution of the foreign branches or subsidiaries of the local bank INAF has the authority to establish relations and cooperation agreements with foreign supervisory authorities, but has not yet signed any. Efforts to agree on an MOU with the BE were not successful. Restrictions on the ability of the foreign supervisor to conduct un announced on-site examinations on affiliates of foreign banks and have full access of nominative information on their assets were an obstacle to this agreement. The INAF has indicated that it is willing to facilitate nominative information of large exposures and that it would welcome the opportunity to conduct joint on-site inspections with foreign supervisors. While these are important steps, it is recommended to empower INAF to share with the home country supervisor all information about the local operations of the foreign banks, necessary to conduct an effective supervision of these banks, provided its confidentiality is protected…

Table 6.

Andorra: Recommended Action Plan to Improve Compliance with the Basel Core Principles

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Authorities’ response

70. The Andorran authorities welcome that the assessment recognises that their supervisory system is broadly sound and that efforts have been made to address several recommendations of the 2002 IMF mission. They also indicated that they wish to continue improving financial sector supervision, as evidenced by the several draft laws and regulations that are in the process of being approved at the time of the assessment. The Andorran authorities agreed with most of the assessment and recommendations. However, they have some observations on the assessment of CPs 1, 10, 14, 16 and 20.

71. Regarding CP 1 the authorities highlighted that the current legal framework has demonstrated its efficacy throughout the years due to the good cooperation between the MF and the INAF. They also stressed that the government always takes into account INAF’s opinion when deciding on sanctions. The MF is considering the recommendation to empower INAF to impose all sanctions, including those typified as “very serious”, but stressed that the final decision on the authorization and revocation of banking licenses should remain in the hands of the government. In their view, it would be necessary to strike a balance between INAF’s technical decisions and the approval of the government.

72. On CP 10, the authorities pointed out that Communication n° 163/05 of INAF has provisions for the behaviour of staff and Board members of financial groups, including when carrying out their own operations. They also stated that banks have in place mechanisms to ensure that credits to insiders and related parties are not granted at preferential rates and those transactions to insiders, such as the credits to members of the bank’s Board of Directors, require Board approval. However, upon, the IMF’s recommendation, INAF will consider issuing a communication requiring explicitly that these credits be approved by the Board and stipulating they should not be granted at rates below other costumers.

73. On the recommendation that members of the Board of Directors of banks attend the annual tripartite meeting between INAF, external auditors, and bank senior staff, the Andorran authorities consider more useful to have separate meetings with Board members, without external auditors, to treat matters related to the management of the banking establishments.

74. On CP 16, INAF stressed that, with the recent increase of four staff members, it will be able to conduct on-site inspections with its own supervisory staff and recognized that an additional staff increase will be needed when it assumes the responsibility for insurance oversight. They also pointed out that external auditors provide an important support for supervision and that INAF is in constant communication with external auditors to clarify its requirements and ensure that they meet these requirements.

75. On CP 20, the authorities indicated that INAF’s charter includes a provision regarding the transfer to INAF of the responsibility for supervising insurance companies and it commands the government to present to the General Council a new insurance regulation law. For the government, the new insurance regulation law is a priority and once this text will be approved, the responsibility for supervision of insurance will be carried out by INAF. The authorities also stressed their willingness to cooperate with foreign supervisors, as mandated in Andorra’s current legal framework, a fact that, in their view, is not adequately reflected in the report.


See PIN No. 03/138 at for a summary of the Executive Board discussion.


The law 14/2003 superseded the original charter issued in 1989 and is referred to as INAF’s “charter” hereupon.


The actual share of foreign capital in the banking system has fallen from 36 percent to 1 percent from 2002 to end-2006.


Andorra: Assessment of the Supervision and Regulation of the Financial Sector, August 2002.


Compliance was found in 14 principles, large compliance in 13 principles, material noncompliance in 2 principles, and 1 principle was deemed not applicable.


EU Directive 2003/48. Tax retention of 15 percent of savings income earned by EU residents applies from July 1, 2005. The tax rate increases to 20 percent on July 1, 2008 and to 35 percent on July 1, 2011.


The 2005 premiums include the transfer of assets into capitalization schemes, an event that is not likely to be repeated in 2006.


The remainder were loans to residents.


Figures on resident and non resident deposits are expected to be available starting on 2007.


Since 2005 Credit Andorra owns 100 percent of Caixa Bank.


Minimum Capital to Risk Weighted Assets (CAR) as defined in Basel 1.


Andorran banks are required to hold liquid assets for at least 40 percent of short-term liabilities.


Directive 2002/87/EC of the European Parliament and the Council of December 16, 2002.


INAF Law, Second transitional provision.


Complementary Reports (Informes Complementaris) are prepared by external auditors following the requirements issued by INAF, and they cover assessments of a broad range of issues including internal controls, risks management and compliance with key prudential requirements.


The government is comprised of the Cap de Govern and all the ministers.

Andorra: Assessment of Financial Sector Supervision and Regulation
Author: International Monetary Fund