Supervisory Review and Evaluation Process (SREP)

Scope and app of the SREP (articles 1, 2, 15, 16, 99 and 100 of the Law 35/2018, of 20 December, on the solvency, liquidity and prudential supervision of banks and investment firms)

The Andorran Financial Authority (AFA), as the authority of the financial system, conducts prudential supervision of institutions in a manner that is consistent with the general prudential requirements that banks and investment firms must meet in relation to:

  1. own funds requirements for fully quantifiable, uniform and standardised elements of credit risk, market risk, operational risk and settlement risk;
  2. requirements to limit large exposures;
  3. liquidity requirements for fully quantifiable, uniform and standardised liquidity risk elements;
  4. information requirements relating to subparagraphs i), ii), and iii), in terms of leverage; and
  5. public disclosure requirements.

Notwithstanding the provisions of Law 35/2018 and based on the principle of proportionality and the specific activities of each type of institution, the supervisory review and evaluation process of the AFA is applicable to banks, investment financial bodies, collective investment schemes management companies, non-bank specialised credit financial bodies and insurance and reinsurance institutions in the Principality of Andorra.

In this sense, the AFA applies its supervisory model taking into account the principle of proportionality by categorising the operating entities of the financial system according to their systemic importance and the scope of their cross-border activities. In addition, depending on this category, the SREP minimum dedication model is also adjusted and the frequency, scope and intensity of the evaluation are determined.

Likewise, proportionality equally applies when defining the different stress tests.

In addition, this process is carried out on an individual and consolidated basis on the operating entities of the financial system and therefore on the operating entities and their consolidating groups, including financial holding companies and mixed financial holding companies, as defined in paragraphs 55 and 57 of Article 3, paragraph 1, respectively of Law 35/2018. The AFA also supervises the significant operations of a financial system operating entity with its parent mixed-activity holding company, as defined in paragraph 58, paragraph 1 of Article 3 of Law 35/2018, and its operations with the subsidiaries of this mixed-activity holding company. This process is also applied on an individual basis.

Evaluation of the elements of the SREP (articles 17 to 26 and articles 89 and 90 of Law 35/2018, of 20 December, on the solvency, liquidity and prudential supervision of banks and investment firms; article 14 of Law 7/2013, of 9 May, on the legal regime of the operative entities of the Andorran financial system and other provisions regulating the exercise of financial activities in the Principality of Andorra; and articles 6 to 6k of Law 8/2013 of 9 May 2013, on the organisational requirements and terms of operation of operative entities of the financial system, protection of investors, market abuse and financial guarantee agreements)

The supervisory review and evaluation process of the AFA comprises the following components:

  • Classification of institutions and periodic review of this classification;
  • continuous risk assessment:
    • monitoring of key indicators;
    • analysis of the business model;
    • assessment of internal governance and global controls;
    • assessment of risks to capital;
    • assessment of liquidity and financing risks
  • periodic assessment of the adequacy of the institution’s own funds and liquidity;
  • overall assessment of the SREP; and
  • dialogue with institutions, supervisory measures (and early action measures, as appropriate) and communication with supervised entities.

Review and evaluation of the ICAAP (Internal Capital Adequacy Assessment Process) and the ILAAP (Internal Liquidity Adequacy Assessment Process) (articles 15, 25 , 91, 92 and 96 of Law 35/2018, of 20 December, on solvency, liquidity and prudential supervision of banks and investment firms)

By Technical Communiqué No. 263/20-EB, the AFA has published the Supervisory Guide on the Self Valuation Processes of Capital (PAC) and Liquidity (PAL) of Banks.

The purpose of this Guide is therefore to facilitate the application by banks of the processes of self-assessment of capital and liquidity established in Articles 15 and 25 of Law 35/25018.

In particular, the Guide develops certain aspects of the processes that institutions use to assess the quantitative aspects of:

  • the measure of the risks to which they are exposed as regards own resources;
  • the estimation of the own resources necessary to cover these risks; and
  • the measure of the liquidity level.

In addition, in order to ensure effective risk management, this Guide also develops qualitative aspects that institutions consider on issues contained in article 74 of CRD IV and transposed into article 6 of the Law 8/2013, of 9 May 2013, on the organisational requirements and terms of operation of operative entities of the financial system, protection of investors, market abuse and financial guarantee agreements, as regards:

  • internal corporate governance;
  • identification, management, control and communication of risks; and
  • internal control mechanisms.

Likewise, the issuance of this Guide aims to adapt to the methodologies and supervisory practices contained in the guides issued by:

These processes, which are known by their acronyms ICAAP (Internal Capital Adequacy Assessment Process) and ILAAP (Internal Liquidity Adequacy Assessment Process) have been referred to in this Guide as the Capital Self-Assessment Process (PAC) and the Liquidity Self-Assessment Process (PAL).

The AFA reviews and evaluates the PAC and the PAL of the entities under the SREP. This annual assessment is based, in particular, on the Capital and Liquidity Self-assessment Report (IACL) that institutions are required to report annually to the AFA.

In this sense, the IACL must be presented to the AFA before 12 May, or the next working day in the case of a public holiday or non-working day, of each financial year, referring to the previous financial year closed on 31 December.

Overall evaluation of the SREP (articles 95 to 97 of the Law 35/2018, of 20 December, on the solvency, liquidity and prudential supervision of banks and investment firms)

In order to determine the overall assessment of the SREP, the AFA takes into account the results of the evaluations of the elements of the SREP, specifically:

  • the risks to which the entity is or may be exposed;
  • the possibility for the internal government, the control deficiencies and/or the institution’s strategy or business model may increase or reduce these risks or expose it to new sources of risk;
  • whether the institution’s own funds and liquidity provide a sound hedge for these risks; and
  • the potential for positive and negative interaction between the elements.

Along the lines of these considerations, the viability of the institution is determined on the basis of the adequacy of its own funds and liquidity, government, controls and/or strategy or business model to cover the risks to which it is or may be exposed and to determine its proximity to a point from which it will no longer be viable.

Consequently, the AFA:

  • takes any necessary supervisory measures to address problematic issues (in addition to specific measures taken to address the specific results of SREP evaluations); and
  • determines the future supervisory resources and planning necessary for the entity and decides whether the entity should be integrated into the supervisory review programme (Article 93 of Law 35/2018).

The overall evaluation of SREP is reflected in a score based on the considerations specified below and is clearly documented in an annual summary of the overall evaluation of SREP. This annual summary includes, in addition to the overall score of the SREP and the scores of the different elements of the SREP, any other monitoring results obtained during the previous 12 months.

Andorra la Vella, 13 August 2020