ANDORRA Law and Practice Contributed by: Miguel Cases and Laura Nieto, Cases & Lacambra
of the risk-weighted assets and 6% of the part corresponding to Tier 1 capital. Law 35/2018 also introduces the obligation to cover 100% of the liquidity outflows net of liquidity inflows with high liquidity assets, with - in 30 days and in a stress scenario such as a major withdrawal of deposits. Other obligations include: • the inclusion of intra-day operations in the supervision regime; • the obligation to develop methodologies to manage the positions of financing; • making a distinction between pledged assets and unencumbered assets; and • the adoption of liquidity recovery plans. Regarding structural long-term liquidity ratios or stable funding, Andorran provisions require banking entities to cover their long-term liabili - ties (ie, longer than 12 months) through a variety of stable funding instruments, under both nor - mal and stress conditions. On a quarterly basis and in a single currency, they must also report to the AFA on the elements that require stable financing. Law 35/2018 also includes the obligation to pub - lish the so-called solvency report, which must include the following information: • data on the financial situation and activity of the banking entity; • market strategy; • risk control; • internal organisation and corporate govern - ance; and • compliance with the minimum equity require - ments laid down in the solvency regulations.
Likewise, banking entities must have poli - cies and processes in place for the identifica - tion, management and monitoring of the risk of excessive leverage. These indicators include the leverage ratio, which is the amount of Tier 1 capital of the entity divided into the total exposure value of the entity, expressed as a percentage. To this extent, the obliged entity shall address the risk of excessive leverage in a precautionary manner by taking due account of potential increases in the risk of excessive leverage caused by reductions of the entity’s own funds through expected or realised losses, depending on the applicable accounting rules. In addition, entities must submit informa - tion on the leverage ratio to the AFA, which must monitor the levels of leverage in order to reduce the risk of excessive leverage. In addition to other own fund requirements, banking entities must hold a capital conserva - tion buffer and a countercyclical capital buffer to ensure that they accumulate a sufficient capi - tal base, during periods of economic growth, to absorb losses in stressed periods. The counter - cyclical capital buffer should be built up when aggregate growth in credit and other asset classes with a significant impact on the risk profile of such banking entities is judged to be associated with a build-up of system-wide risk, and drawn down during stressed periods. Note also that Andorran banking entities have implemented IFRS standards with the Decree approving the accounting framework for enti - ties and collective investment undertakings created under Andorran law operating in the Andorran financial system, dated 22 December 2016, which requires entities operating in the Andorran financial system and Andorran col - lective investment undertakings to prepare their
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