Supervisory Review and Evaluation Process (SREP)

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

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

  1. the own funds requirements to entirely quantifiable, uniform and standardised elements of credit risk, market risk, operational risk and settlement risk;
  2. requirements that limit large exposures;
  3. liquidity requirements relating to entirely quantifiable, uniform and standardised elements of liquidity risk;
  4. information requirements relating to sub-sections i), ii), and iii), and to 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 entity, the AFA’s supervisory review and evaluation process is applicable to banking entities, investment firms, management companies of undertakings for collective investment, non-banking specialised credit financial entities and insurance and reinsurance companies in the Principality of Andorra

In this sense, the AFA applies its supervisory model taking into account the principle of proportionality by categorising the operative 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 engagement model is also adjusted and the frequency, depth and intensity of the assessments 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 operative entities of the financial system and therefore on the operative entities and their consolidating groups, including financial holding companies and mixed financial holding companies, as defined in paragraphs 55 and 57, paragraph 1 of Article 3, respectively of Law 35/2018. The AFA also supervises the significant transactions of a operative entity of the financial system with its parent mixed activity holding company, as defined in paragraph 59, paragraph 1 of Article 3 of Law 35/2018, and its transactions with the subsidiaries of this mixed activity holding company. This process is also applied on an individual basis.

Assessment 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 banking entities 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 6 duodecies 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 elements:

  • Categorisation of the entities and periodic review of this categorisation;
  • continuous risk assessment:
    • monitoring of key indicators;
    • business model analysis;
    • assessment of internal governance and gentity-wide controls;
    • assessment of risks to capital;
    • assessment of risks to liquidity and funding:
  • periodic assessment of the adequacy of the entity’s own funds and liquidity;
  • overall SREP assessment; and
  • dialogue with entities, 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 banking entities and investment firms)

By Technical Communiqué No. 263/20-EB, the AFA has published the Supervisory Guidelines on the Self-assessment Processes of Capital (PAC) and Liquidity (PAL) of Banking Entities.

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

In particular, the Guideline develops certain aspects of the processes that entities use to assess the quantitative aspects on:

  • the measurement to own funds risk to which they are exposed;
  • the necessary own funds estimate to cover these risks;
  • the measurement of the liquidity level.

In addition, in order to ensure effective risk management, this Guideline also develops qualitative aspects that entities consider on issues contained in article 74 of CRD IV and transposed into article 6 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, as regards:

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

Likewise, the issuance of this Guideline aims to adapt to the methodologies and supervisory practices contained in the guidelines 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 Guideline 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 entities 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 SREP assessment (articles 95 to 97 of Law 35/2018, of 20 December, on the solvency, liquidity and prudential supervision of banking entities and investment firms)

In determining the overall SREP assessment, the AFA takes into account the findings of the assessments of the SREP elements, 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 entity’s own funds and liquidity resources provide sound coverage of these risks; and
  • the potential for positive and negative interaction between the elements.

Along the lines of these considerations, the entity’s viability is determined on the basis of the adequacy of its own funds and liquidity resources, governance, 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 of non-viability.

Consequently, the AFA should:

  • take any supervisory measures necessary to address concerns (in addition to specific measures taken to address specific findings of the SREP assessments); and
  • determine future supervisory resourcing and planning necessary for the entity and decide whether the entity should be placed in the supervisory examination programme  (Article 93 of Law 35/2018).

The overall SREP assessment is reflected in a score based on the assessment of the SREP elements and is clearly documented in an annual summary of the overall evaluation of this process. This annual summary includes, in addition to the overall SREP score and scores for the different elements of the SREP, and any other supervisory findings made over the course of the previous 12 months.

Andorra la Vella, 13 August 2020