Andorra is a developed country with a stable free market economy. Its high per capita income is above the European average. More than three quarters of the Andorran GDP is accounted for by the services industry. Its domestic fiscal status provides for duty-free shopping on several goods that attracts large numbers of holidaymakers and short term visitors. Even though Andorra is not a member of the European Union, it does participate since 2011 in the European currency. Bank secrecy laws were thus eased and monetary policy is subject to ECB oversight.
The regulatory framework to supervise the Andorran financial sector was strengthened after the closure of Banca Privada d’Andorra (BPA). This matter revealed critical differences in international procedures and the dramatic consequences of alleged regulatory violations in other jurisdictions. The bank was too big to rescue with tax payer money and thus placed under official administration by regulators in Andorra and Spain for its subsidiary. A moratorium on outgoing payments was imposed and account holders could withdraw only 2.500 Euro per week. Viable assets were transferred to a new bank, Vall Banc and an audit was done to separate legitimate creditors from wrongdoers. In 2018, the law on bank deposit protection was strengthened to ensure fast repayment to eligible account holders of their insured deposits.
Economic Crises and the Financial System
Financial instability impacts economic growth and society. Public confidence and efficient markets trigger optimism. Optimism drives the economy and thus ensures support of the current capitalist system. To mitigate the impact of economic crises to society, several actions to limit the free market are justified. This means the implementation of a strong and efficient legal system that includes regulation, judiciary and enforcement, a system of proprietary rights and suitable accounting standards.
Macro-economic stability, a sound banking system, governance and strong frameworks for prudential regulation and supervision are the preconditions for public confidence in the financial system. To absorb shocks, limit the impact of a crisis and thus maintain high levels of confidence, financial institutions are subject to supervisory control whilst retaining minimal capital and mandatory participation in a local yet external deposit insurance fund.
Bank Deposit Insurance in an International Setting
The objective of bank deposit insurance is primarily to reimburse account holders of insured deposits. Additionally, deposit insurance funds may provide financial support to the resolution of distressed banks. Coverage is limited but credible enough to provide short term liquidity assistance to most retail depositors. The maximized coverage leaves the surplus above the insured limits as risk capital to the account holder. The reasoning behind the maximized level of deposit insurance is to mitigate moral hazard and excessive risk taking while promoting depositor discipline by market participants.
Within the European Economic Area and the single market, harmonization is a crucial factor to provide equal treatment to every market participant. European directive 2014/49/EU on deposit guarantee schemes provides member states with the latest framework in matters of institutional bank failure. This directive seeks to increase the stability of the banking system by providing protection of bank deposits of eligible account holders. To substantiate the procedures for bank resolution, strict procedures are formulated in directive 2014/59/EU, amended by 2019/879/EU on the BRRD.
Financial Regulation and Early Intervention
Regulatory frameworks for the financial industry focus on prevention of institutional and systemic crises. Meanwhile, resolution and recovery planning manage the adverse effects of a financial meltdown. A focus on both the front and backend of financial regulation seeks to maintain public confidence whilst protecting regular savers and the tax payer. Early intervention can reduce the impact of a financial crisis by focusing on recoverability and resolvability. The objective is to identify the most favorable outcome for all stakeholders and simultaneously to maintain public confidence. Bank failure does not always lead to the winding up of the business. Resolution tools and legal safeguards include bank bail-in, sale of the business, bridge institutions, asset management, and government stabilization tools. Only when it is in the best interest of the public, and creditors benefit most from closure of the business, insolvency proceedings are initiated. To dissolve a licensed financial institution, the resolution authority must substantiate its decision.
Bank Deposit Protection in Andorra
The current applicability of bank deposit protection and investor compensation is codified since 2018 in Law 20/2018. The law governs the Andorran Deposit Guarantee Fund, FAGADI and the Investor Compensation Scheme, SAGI. Both schemes are funded by its members, i.e. licensed and supervised deposit taking credit institutions. The schemes are based on the European directives on deposit guarantee schemes and investor compensation. As a result, covered and eligible bank deposits held by natural and legal persons that become unavailable are subject to maximized protection of 100.000 euro. In addition, for a period of three months, specific deposits may qualify for an extra maximized coverage of 300.000 euro.
In line with other European bank deposit guarantee schemes, FAGADI makes repayable amounts available within seven working days. To determine whether a claim is repayable, account holders must submit a claim form supported by claim ownership. The claimant must identify himself to initiate the claim verification procedure. Repayment is rejected when the claim is not eligible and may be deferred when there is uncertainty on deposit ownership, when no transactions were made on the account within the last 24 months, when the repayable amount exceeds 100.000 euro and when the deposit is subject to restrictive measures.
Repayment of the insured account balance is made to eligible creditors by bank transfer. Payment is only made when the claimant has taken all necessary measures to allow the repayment to take place. The claimant must therefore provide FAGADI with bank account data in the name of the claimant held with licensed credit institution authorized to operate in Andorra. FAGADI is available to creditors of a failed financial institution for a period of five years. FAGADI claims submitted after this period are not taken into consideration and account balances are subject to settlement via the general resolution procedures.
Large Claims, Civil Action and Bank Liquidation
Banks that fail have difficulties to repay their account holders on demand. Failure is often the result of capital shortages, or institutional violations, that is followed by regulatory intervention placing a moratorium on payments. Account holders with large claims should pay close attention to the different stages of bank resolution to ensure maximum repayment.
Regulatory intervention triggers statutory administration by taking over management of the bank. Simultaneously payment facilities are blocked until the special administrator has determined the appropriate ways to resolve the issue. Within a reasonable time, the special administrator may decide to allow restricted access to payment systems and capped withdrawals for account holders. Such arrangements are temporary until the FAGADI deposit protection scheme is activated. The Andorran DGS protects eligible account balances up to 100.000 euro and has a special arrangement to raise the coverage with another 300.000 euro in exceptional circumstances.
The circumstances surrounding the closing of the bank will determine its future prospects. Bank resolution procedures have three main objectives. The first objective is to ensure the return of the assets to creditors while respecting the applicable creditor hierarchy. Resolution also seeks to ensure timely engagement with supervisory bodies and other stakeholders. Ultimately, the financial institution should be placed into compliance with the applicable regulation, or being resolved as a going concern, or wound up in the best interest of the creditors. General bank liquidation procedures that apply to universal banks are outlined in this article.
Even though bank resolution aims to minimize risk to account holders and the public, creditors may feel wronged and thus willing to take civil action. Regulatory frameworks expose large deposits above the limits of deposit insurance to market discipline. However, this does not always justify excessive losses for unaware creditors. Therefore, creditors may pursue civil action against the bank or the regulator. Such legal action should be based on realistic indicators and a high probability of success.
Contact us For More Information
This website is an initiative of Legal Floris LLC. Since more than a decade, we have helped international creditors recover money when their bank fails or their investments disappear. Due to our vast experience in dozens of bank failures in different countries, Andorra included, we are able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you too to reclaim your account balance if your bank in Andorra stops operating:
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