Andorra will have a new security element in its financial system. The Government has presented the bill for the creation of international reserves that will convert the country, and the Andorran Finance Authority (AFA) as administrator and in charge of custody, into a lender of funds to banks in risky situations. The reserve pool allocated for this purpose will reach 340 million euros, since the plan is to achieve that balance of international reserves.
The bill was presented by the Finance Minister, Eric Jover, together with the general director of the AFA, David Cerqueda. This legal action will allow liquidity to be provided to a financial institution in need without this step affecting the general health of the banking system. "There is no forecast that banking entities need it, but the more security networks we have, the better," said Minister Jover.
In this way, progress is made in international standardization and a response is given to Andorra's structural weaknesses, of which the international financial markets and rating agencies were aware. The fact of not having this liquidity system for emergencies until now meant a higher financing cost for the State and for the financial sector itself. This is what David Cerqueda certifies, for whom "the direct effect of having a provider of last resort will be an improvement in the country's risk perception, which will mean a reduction in the financial cost for the Government, banks, companies and individuals, which It will generate better competitiveness.
Andorra has international reserves of 240 million, present in two scenarios: 140 million in special drawing rights, the currency of the International Monetary Fund (IMF) and 100 million in the Bank of Spain, managed by the AFA. The goal is to reach a volume of international reserves equivalent to 12% of gross domestic product (GDP) by 2021, which means climbing to 340 million before the end of this year. Cerqueda confirmed the negotiations that the AFA maintains with the Bank of France and the Central Bank of the Netherlands to expand the volume of reserves.
The crisis situations in which it would be possible to use these reserves would be both natural disasters or pandemics, as well as those in which a financial institution must obtain resources from a lender of last resort, for an exceptional provision of funds to face a temporary liquidity stress. "Providing ourselves with a lender of last resort mechanism allows us to stop being an exception and take another step towards the consolidation and international standardization of our financial system," said Cerqueda.
To apply for a loan, financial institutions must have previously exhausted the rest of the conventional possibilities to remedy their liquidity problems. The beneficiary bank must be viable and solvent and must provide guarantees for a value significantly higher than the requested amount of liquidity. Likewise, a dissuasive interest rate and a maximum period of six months will be set with the possibility of a single extension. The AFA will analyze the request and decide.
The bag that can be accessed only with the supervision of the AFA will be 200 million. The maximum will be 340 million, but will require government permits. For Cerqueda, “with this mechanism a historical weakness of the financial system and the economic resilience of the principality is resolved”. The lender-of-last-resort system of choice has been developed with the support of IMF staff.