Andorra's Banking Sector: Opportunities and Risks

Selected Issues Papers, December 29, 2025

Source details

Large and distinct banking sector with a strong focus on private banking.
Comparative analysis with peer microstates and financial centers in Europe.
Emphasis on Andorran banks’ reliance on deposits, strong capital and liquidity buffers, and expansion into international markets.
Panel dataset of 275 private banks across 39 countries used for empirical analysis.
Publication date: December 29, 2025.

Andorran banks rely on deposits as a primary funding source.
Banks exhibit strong capital and liquidity buffers.
Expansion into international markets is an observed strategy among Andorran banks.
Determinants of profitability identified in the panel analysis include:
- bank size
- capitalization
- GDP growth
- interest rates
Importance of proactive supervision and macroprudential tools to manage systemic risks, particularly given the absence of a central bank.

Systemic risks are elevated by the absence of a central bank.
Dependence on deposit funding may create vulnerabilities under stress scenarios.
Cross-border expansion increases exposure to international market risks.

Strengthen proactive supervision to monitor and mitigate emerging risks.
Deploy macroprudential tools to manage systemic vulnerabilities, including those related to capitalization and liquidity.
Consider policy measures that address risks from international expansion while preserving the strengths of private banking.

The paper explores implications of Andorra’s EU Association Agreement on the banking sector, including potential effects on financial integration and regulatory alignment.

Subjects: Bank soundness, Commercial banks, Countercyclical capital buffers, Economic sectors, Financial institutions, Financial regulation and supervision, Financial sector, Financial sector policy and analysis
Keywords: Andorra; Andorra's banking sector; Assets under management; Bank soundness; Banking sector; Capital buffers; Caribbean; Central America; Commercial banks; Countercyclical capital buffers; EU Association Agreement; Europe; Financial integration; Financial sector; Global; IMF country; IMF staff; International expansion; issues paper; Liquidity; Macroprudential policy; Microstate; Private banking; Profitability; regulation; South America; supervision; Systemic risk