## 2. Compared to peers, Andorran banks operate in a different regulatory and institutional ## Source details **Canonical URL:** [2. Compared to peers, Andorran banks operate in a different regulatory and institutional](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025152.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025152.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025152.pdf.json) --- ### Banking landscape and ownership - Only 3 banks operate currently in Andorra after several mergers. - All banks are majority privately owned by local families. - Andorran banks are banking groups that consist of diversified financial services companies in Europe, Latin America, and the U.S. - Some banks have ownership in real sector companies in Andorra. - Andorran banks differ from peers where foreign banks are present. ### Institutional framework and safety nets - Andorra adopted the euro after signing a Monetary Agreement with the EU in 2011 but does not have a central bank. - Andorran banks do not have direct access to a national central bank or to ECB refinancing facilities unlike banks in peer countries. - Introduction of the lender of last resort facility in 2022 provides a backstop for a solvent, but temporarily illiquid bank, but is unlikely to change bank holdings of significant liquidity buffers as a self-insurance. - The Andorran Financial Authority (AFA) is the supervisor and regulator established in 1989; AFA conducted annual and thematic on-site inspections of the three banks and had a staff of 25 people at the end of 2022. - The Financial Intelligence Unit of Andorra (UIFAND) was created in 2000 for AML/CFT issues. - The Agency of Resolution of Banking Entities was created in 2015 and is responsible for recovery and resolution of banking institutions. - The AFA and the UIFAND cooperate with supervisors in countries where Andorran banks operate. ### Prudential positions and liquidity - As of 2023Q3, system-wide total capital ratio was 16.3 percent and Tier 1 ratio was 15.6 percent. - As of 2023Q3, the system-wide LCR ratio was 200 percent, above the regulatory minimum of 100 percent. - To compensate for limited financial safety nets, Andorran banks have traditionally held solid capital buffers and significant liquidity buffers as self-insurance. ### Assets under management (AUM) and private banking focus - AUMs have been growing consistently, reaching €64 billion in 2022, equivalent to 20-times GDP in 2022. - By the ratio of AUMs to GDP, Andorran banks are the third largest group among their peers. - AUMs are held primarily off-balance sheet. - Private clients are mostly in Andorra and Spain, with some subsidiaries in other countries in Europe and in Americas. - Andorran banks receive a significant share, sometimes a majority, of their profits from international operations. ### Asset composition and commercial banking - About half of Andorran on-balance sheet bank assets were in loans at the end of 2022. - At the end of 2022, a fifth of on-balance sheet assets were in debt securities, and 6 percent in cash. - Domestic credit is primarily allocated to private companies and households; domestic loans to the government are small as the central government switched to borrowing externally from 2020. - Credit to the private sector to GDP was 190 percent (latest cited), the highest compared to the peer group, even after a decline from the peak in 2020. - About 41 percent of those loans are given to non-residents (majority are short-term loans to foreign banks to manage liquidity). - Andorran banks led their peer group in 2022 with ROA of 0.6 percent and ROE of 6 percent (though ROE was below the EU average). - Net fees and commissions historically represented more than half of total operating income; net interest income share was about 20 percent historically. - Interest rate increases boosted net interest margin, estimated to account for half of operating income in 2023 (estimate based on unaudited and preliminary 2023Q2 data). ### Cost structure - Cost-to-income ratio for Andorran banks is between 70 and 85 percent, placing them in the middle of their peer group and similar to other private banks. ### Funding structure - Deposits account for almost 90 percent of funding. - One third of deposits comes from nonresidents, mostly related to private banking activities; these deposits are typically tied to investments and tend to be sticky. - Andorran banks rely significantly less on debt securities and other sources of funding compared to the EU average. - Structural liquidity and deposit funding have allowed financing growth without much borrowing. ### International expansion and supervision of subsidiaries - Growth has focused on new markets abroad via private banking and asset management services in Europe and Americas. - Subsidiaries abroad are subject to host countries’ regulations and supervision; in euro area countries, subsidiaries have access to ECB liquidity facilities. - Expansion abroad diversifies revenue but exposes banks to market-specific risks in other countries. ### Determinants of private banks’ profitability (panel regressions for 275 private banks, 2013–2022) - Data: 275 private banks from 39 countries (including 5 banks from Andorra) from Fitch database; outcomes ROAA and ROAE. - Explanatory variables: log Total Assets, Equity/Total Assets, Real GDP growth, Lagged interest rate. - Regression results: - log Total Assets: ROAA coefficient 0.302** (standard error 0.026); ROAE coefficient 0.129 (0.605). - Equity/Total Assets: ROAA coefficient 0.118*** (0.000); ROAE coefficient 0.07*** (0.000). - Real GDP growth: ROAA coefficient 0.304** (0.02); ROAE coefficient 0.352 (0.143). - Lagged interest rate: ROAA coefficient 0.692** (0.049); ROAE coefficient 2.263*** (0.000). - Constant: ROAA 0.925 (0.413); ROAE 3.664* (0.077). - Observations: 1,919 for both ROAA and ROAE. - Adjusted R-squared: 0.166 for ROAA; 0.022 for ROAE. - F statistic: 94.9 (0.000) for ROAA; 11.74 (0.000) for ROAE. - Interpretation: - Size, capitalization, real GDP growth, and interest rate are positively associated with profitability. - Higher interest rate and capitalization are significant for both ROAA and ROAE. - Real GDP growth rate and bank size are significant for ROAA. - The relatively low R-squared values are noted as common in cross-country banking regressions. ### Risks, past crises, and institutional implications - With total assets 5.5 times the country’s economy, consolidated assets of each bank exceed GDP. - Private banking tends to have lower credit risks (loans collateralized) and market risks mainly on clients’ side; main risks lie in compliance, reputational, and operational risks. - The failure of Banca Privada d'Andorra (BPA) in 2015 illustrated these risks. - Concentration and related party risk exist due to small internal market, though exposures have been decreasing. - Lessons from other large-banking economies (Box 1) highlight risks from rapid asset growth, reliance on foreign wholesale funding, importance of stringent regulation (e.g., LTV limits), hands-on supervision, subsidiarization of foreign operations, and strong fiscal and external buffers. - Andorra has strengthened AML/CFT framework with a new AML/CFT law, closer cooperation between UIFAND and international organizations, and enhanced coordination between AFA and UIFAND. ### EU Association Agreement and potential effects - The recently agreed EU Association Agreement provides a 15-year transitional period to align financial sector legislation, supervision, and regulation with the EU across banking, insurance, asset management, and securities market. - The Association Agreement may open opportunities to access new markets and use passporting to expand into the single market more easily and at lower compliance costs. - The Liechtenstein precedent shows potential for significant growth after association arrangements: in 2022 Liechtenstein banks’ AUM reached 411 billion Swiss francs, or about 60 times the country’s GDP. - European banks entering Andorra under the same conditions could lead to significant changes in the domestic financial sector structure. - Despite progress harmonizing regulation with the EU under the Monetary Agreement, a substantial scope of work remains. ### Key statistics (preserved verbatim) - Number of banks currently operating in Andorra: 3 - AUM in 2022: €64 billion - AUM to GDP (2022): 20-times GDP - System-wide total capital ratio (2023Q3): 16.3 percent - Tier 1 ratio (2023Q3): 15.6 percent - System-wide LCR ratio (2023Q3): 200 percent - Regulatory minimum LCR: 100 percent - Credit to the private sector to GDP: 190 percent - Share of domestic loans given to non-residents: 41 percent - ROA (2022): 0.6 percent - ROE (2022): 6 percent - Net interest income historical share: about 20 percent; estimated share of operating income in 2023: half (estimate based on unaudited and preliminary 2023Q2 data) - Cost-to-income ratio: between 70 and 85 percent - Deposit share of funding: almost 90 percent - Share of deposits from nonresidents: one third - AFA staff at end-2022: 25 people - Observations in profitability regressions: 1,919 - Adjusted R-squared (ROAA): 0.166 - Adjusted R-squared (ROAE): 0.022 ### Policy implications and recommendations (drawn from analysis) - Maintain substantial capital and liquidity buffers given limited access to central bank liquidity and large bank size relative to GDP. - Strengthen recovery and resolution frameworks; implement the EU Bank Recovery and Resolution Directive. - Prepare banks and supervisors for the 15-year Association Agreement transition: banks should plan for greater competition and supervisors should align regulation with the EU. - Expand AFA staffing and resources to supervise transition and an expected larger financial sector. - Continue close cooperation between AFA and UIFAND and with foreign supervisors where Andorran banks operate. - Use macroprudential tools proactively; the activation of the countercyclical capital buffer to 0.5 percent from Oct 1, 2024, is timely. --- *Source: sipea2025152 - 2. Compared to peers, Andorran banks operate in a different regulatory and institutional; 15. Diversification helps to stay competitive. Evidence shows that Andorran banks are large,* ### 2. Compared to peers, Andorran banks operate in a different regulatory and institutional ### sipea2025152 - 2. Compared to peers, Andorran banks operate in a different regulatory and institutional ### Banking landscape and ownership - Only 3 banks operate currently in Andorra after several mergers. - All banks are majority privately owned by local families. - Andorran banks are banking groups that consist of diversified financial services companies in Europe, Latin America, and the U.S. - Some banks have ownership in real sector companies in Andorra. - Andorran banks differ from peers where foreign banks are present. ### Institutional framework and safety nets - Andorra adopted the euro after signing a Monetary Agreement with the EU in 2011 but does not have a central bank. - Andorran banks do not have direct access to a national central bank or to ECB refinancing facilities unlike banks in peer countries. - Introduction of the lender of last resort facility in 2022 provides a backstop for a solvent, but temporarily illiquid bank, but is unlikely to change bank holdings of significant liquidity buffers as a self-insurance. - The Andorran Financial Authority (AFA) is the supervisor and regulator established in 1989; AFA conducted annual and thematic on-site inspections of the three banks and had a staff of 25 people at the end of 2022. - The Financial Intelligence Unit of Andorra (UIFAND) was created in 2000 for AML/CFT issues. - The Agency of Resolution of Banking Entities was created in 2015 and is responsible for recovery and resolution of banking institutions. - The AFA and the UIFAND cooperate with supervisors in countries where Andorran banks operate. ### Prudential positions and liquidity - As of 2023Q3, system-wide total capital ratio was 16.3 percent and Tier 1 ratio was 15.6 percent. - As of 2023Q3, the system-wide LCR ratio was 200 percent, above the regulatory minimum of 100 percent. - To compensate for limited financial safety nets, Andorran banks have traditionally held solid capital buffers and significant liquidity buffers as self-insurance. ### Assets under management (AUM) and private banking focus - AUMs have been growing consistently, reaching €64 billion in 2022, equivalent to 20-times GDP in 2022. - By the ratio of AUMs to GDP, Andorran banks are the third largest group among their peers. - AUMs are held primarily off-balance sheet. - Private clients are mostly in Andorra and Spain, with some subsidiaries in other countries in Europe and in Americas. - Andorran banks receive a significant share, sometimes a majority, of their profits from international operations. ### Asset composition and commercial banking - About half of Andorran on-balance sheet bank assets were in loans at the end of 2022. - At the end of 2022, a fifth of on-balance sheet assets were in debt securities, and 6 percent in cash. - Domestic credit is primarily allocated to private companies and households; domestic loans to the government are small as the central government switched to borrowing externally from 2020. - Credit to the private sector to GDP was 190 percent (latest cited), the highest compared to the peer group, even after a decline from the peak in 2020. - About 41 percent of those loans are given to non-residents (majority are short-term loans to foreign banks to manage liquidity). - Andorran banks led their peer group in 2022 with ROA of 0.6 percent and ROE of 6 percent (though ROE was below the EU average). - Net fees and commissions historically represented more than half of total operating income; net interest income share was about 20 percent historically. - Interest rate increases boosted net interest margin, estimated to account for half of operating income in 2023 (estimate based on unaudited and preliminary 2023Q2 data). ### Cost structure - Cost-to-income ratio for Andorran banks is between 70 and 85 percent, placing them in the middle of their peer group and similar to other private banks. ### Funding structure - Deposits account for almost 90 percent of funding. - One third of deposits comes from nonresidents, mostly related to private banking activities; these deposits are typically tied to investments and tend to be sticky. - Andorran banks rely significantly less on debt securities and other sources of funding compared to the EU average. - Structural liquidity and deposit funding have allowed financing growth without much borrowing. ### International expansion and supervision of subsidiaries - Growth has focused on new markets abroad via private banking and asset management services in Europe and Americas. - Subsidiaries abroad are subject to host countries’ regulations and supervision; in euro area countries, subsidiaries have access to ECB liquidity facilities. - Expansion abroad diversifies revenue but exposes banks to market-specific risks in other countries. ### Determinants of private banks’ profitability (panel regressions for 275 private banks, 2013–2022) - Data: 275 private banks from 39 countries (including 5 banks from Andorra) from Fitch database; outcomes ROAA and ROAE. - Explanatory variables: log Total Assets, Equity/Total Assets, Real GDP growth, Lagged interest rate. - Regression results (Table 1, coefficients and significance): - log Total Assets: ROAA coefficient 0.302** (standard error 0.026); ROAE coefficient 0.129 (0.605). - Equity/Total Assets: ROAA coefficient 0.118*** (0.000); ROAE coefficient 0.07*** (0.000). - Real GDP growth: ROAA coefficient 0.304** (0.02); ROAE coefficient 0.352 (0.143). - Lagged interest rate: ROAA coefficient 0.692** (0.049); ROAE coefficient 2.263*** (0.000). - Constant: ROAA 0.925 (0.413); ROAE 3.664* (0.077). - Observations: 1,919 for both ROAA and ROAE. - Adjusted R-squared: 0.166 for ROAA; 0.022 for ROAE. - F statistic: 94.9 (0.000) for ROAA; 11.74 (0.000) for ROAE. - Interpretation: - Size, capitalization, real GDP growth, and interest rate are positively associated with profitability. - Higher interest rate and capitalization are significant for both ROAA and ROAE. - Real GDP growth rate and bank size are significant for ROAA. - The relatively low R-squared values are noted as common in cross-country banking regressions. ### Risks, past crises, and institutional implications - With total assets 5.5 times the country’s economy, consolidated assets of each bank exceed GDP. - Private banking tends to have lower credit risks (loans collateralized) and market risks mainly on clients’ side; main risks lie in compliance, reputational, and operational risks. - The failure of Banca Privada d'Andorra (BPA) in 2015 illustrated these risks. - Concentration and related party risk exist due to small internal market, though exposures have been decreasing. - Lessons from other large-banking economies (Box 1) highlight risks from rapid asset growth, reliance on foreign wholesale funding, importance of stringent regulation (e.g., LTV limits), hands-on supervision, subsidiarization of foreign operations, and strong fiscal and external buffers. - Andorra has strengthened AML/CFT framework with a new AML/CFT law, closer cooperation between UIFAND and international organizations, and enhanced coordination between AFA and UIFAND. ### EU Association Agreement and potential effects - The recently agreed EU Association Agreement provides a 15-year transitional period to align financial sector legislation, supervision, and regulation with the EU across banking, insurance, asset management, and securities market. - The Association Agreement may open opportunities to access new markets and use passporting to expand into the single market more easily and at lower compliance costs. - The Liechtenstein precedent shows potential for significant growth after association arrangements: in 2022 Liechtenstein banks’ AUM reached 411 billion Swiss francs, or about 60 times the country’s GDP. - European banks entering Andorra under the same conditions could lead to significant changes in the domestic financial sector structure. - Despite progress harmonizing regulation with the EU under the Monetary Agreement, a substantial scope of work remains. ### Key statistics (preserved verbatim) - Number of banks currently operating in Andorra: 3 - AUM in 2022: €64 billion - AUM to GDP (2022): 20-times GDP - System-wide total capital ratio (2023Q3): 16.3 percent - Tier 1 ratio (2023Q3): 15.6 percent - System-wide LCR ratio (2023Q3): 200 percent - Regulatory minimum LCR: 100 percent - Credit to the private sector to GDP: 190 percent - Share of domestic loans given to non-residents: 41 percent - ROA (2022): 0.6 percent - ROE (2022): 6 percent - Net interest income historical share: about 20 percent; estimated share of operating income in 2023: half (estimate based on unaudited and preliminary 2023Q2 data) - Cost-to-income ratio: between 70 and 85 percent - Deposit share of funding: almost 90 percent - Share of deposits from nonresidents: one third - AFA staff at end-2022: 25 people - Observations in profitability regressions: 1,919 - Adjusted R-squared (ROAA): 0.166 - Adjusted R-squared (ROAE): 0.022 *PRINCIPALITY OF ANDORRA, INTERNATIONAL MONETARY FUND* ### 15. Diversification helps to stay competitive. Evidence shows that Andorran banks are large, ### 15. Diversification helps to stay competitive. Evidence shows that Andorran banks are large, ### Diversification, size, and liquidity - Andorran banks are large, notably in terms of AUMs from their private banking activities, and are important financial intermediaries in the domestic economy. - Banks are actively expanding abroad to diversify revenues, which exposes them to foreign macroeconomic and other risks. - Andorran banks keep high liquidity that signals their strong position and acts as self-insurance given the absence of a direct access to a central bank liquidity facility. - The relative diversification of Andorran banks between private and commercial banking activities allows them to balance their performance over changes in market conditions. - Size is associated with profit in the private banking industry. ### Proactive supervision and macroprudential tools - Experience of other countries with large banking systems suggests that a close and proactive supervision using macroprudential tools is necessary to contain the risks. - Given the size of Andorran banks, keeping substantial capital and liquidity buffers by banks is a prudent strategy. - Higher capitalization is associated with higher profitability as shown by the empirical investigation referenced. - Activation of the countercyclical capital buffer by the AFA to 0.5 percent from Oct 1, 2024, is timely given that the economy is growing above potential, allowing to build buffers in good times. - Given the 2023 banking stress experience in the U.S. and Europe, it is important to strengthen the recovery and resolution process in Andorra. - Implementing the EU Bank Recovery and Resolution Directive will further strengthen the supervisory framework in Andorra. ### Expanding capacity to manage the transition and future growth - The Association Agreement with the EU is a test for banks and supervisors. - Over the course of the transition period, banks need to prepare for greater competition, while supervisors have to bring Andorran financial sector regulation in line with the EU. - The AFA should prepare by working together with banks to help them transition to the new environment. - As size is associated with profit in the private banking industry and as a potential consequence of the Association Agreement, Andorran banks are likely to grow further to compete with foreign banks. - The AFA’s resources, notably its staffing, will need to be expanded to supervise the transition and an expected larger financial sector in the country. - Continuing financial and macroeconomic stability during and after the transition period will be key. *Source: sipea2025152 - 15. Diversification helps to stay competitive. Evidence shows that Andorran banks are large,* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025152.pdf_