Macroprudential supervision

The Andorran Financial Authority (AFA) is the authority of the Andorran Financial System and one of its main objectives is to ensure that the stability and reputation of the Andorran Financial System is safeguarded, as it is established in Article 4 of Law 10/2013, of 23 May, on the Andorran National Institute of Finance. Likewise, the AFA exercises the macroprudential supervision and, to this end, it monitors and analyses the evolution of the insurance and reinsurance market, as well as other factors that may have a direct impact on the entities or delegations authorized to operate in the Principality of Andorra, as established in Article 12 of Law 12/2017, of 22 June, on the organisation and supervision of insurance and reinsurance of the Principality of Andorra.

With the entry into force of Law 35/2018, of 20 December, on solvency, liquidity and the prudential supervision of banking entities and investment entities, and Regulation implementing Law 35/2018, of 20 December, on solvency, liquidity and the prudential supervision of banking entities and investment entities, the AFA is the designated authority for the adoption and implementation of macroprudential measures for banking entities and financial investment companies.

In order to achieve the objective of stability of the Financial System, the AFA has at its disposal a series of macroprudential instruments to address systemic risks of cyclical and structural nature.

Macroprudential instruments at the AFA’s disposal under the current legislation are the following ones:

  • Capital conservation buffer: consisting of Common Equity Tier 1 capital, equal to 2,5% of the total risk exposure of an entity. Nevertheless, this buffer is being constituted annually during a period of 4 years until it reaches the aforementioned percentage.
  • Countercyclical capital buffer: it is a capital requirement for banking entities during periods of economic growth, to guarantee a sufficient capital base to absorb losses that may occur during difficult periods. This will help maintain the supply of credit to the economy and dampen the downswing of the financial cycle. The AFA sets the countercyclical capital buffer percentage quarterly for the credit exposures located in the Principality of Andorra.

Countercyclical capital buffer 3rd quarter of 2021

  • Capital buffer for systemically important institutions: this requirement applies to the institutions identified by the AFA as systemically important, with the objective to address the potential negative effects that these institutions may have on the national Financial System due to their systemic relevance. The AFA carries out on an annual basis the review of the list of the entities considered as systematically important and sets the appropriate capital buffers.
  • Systemic risk buffer: this instrument has the purpose of preventing and/or avoiding long-term systemic risks or acyclical macroprudential risks that are not covered by Law 35/2018 and/or the development regulation of the Law. These risks are understood as those that could cause a shock to the Andorran Financial System or those of third countries with seriously negative consequences for the Financial System and the real economy of the Principality of Andorra. Its use is discretional and it may be required for the Andorran financial sector or for one or several subgroups of the sector. Law 35/2018 sets out accumulation rules for combining the systemic risk buffer with buffer for systemically important institutions.
  • Other measures as established in Article 318 of the Development Regulation: changes in the intensity of the macroprudential or systemic risk of the Andorran Financial System with the potential to have serious negative consequences for the Financial System and the real economy of the Principality of Andorra, can justify the adoption of macroprudential measures related to: (i) the level of own funds, (ii) requirements applicable to large exposures, (iii) public disclosure requirements, (iv) the level of the capital conservation buffer, (v) liquidity requirements, (vi) risk weights for targeting asset bubbles in the residential and commercial property sector, (vii) intra financial sector exposures. These measures can be adopted by the AFA with the Government authorisation and for a maximum period of 2 years or until the macroprudential or systemic risk ceases to exist, if that occurs sooner.
  • Exposures guaranteed with mortgages on real estate: a higher risk weight or stricter criteria than those established on paragraph 2 of Article 91 and paragraph 2 of Article 92 of Regulations implementing Law 35/2018, of 20 December, on solvency, liquidity and prudential supervision of banking entities and investment entities may be set, on the basis of financial stability considerations.