Andorra, another little country with big banking troubles: James Saft

(Reuters) - With Andorra now added to the list, how many more examples do we need to see the folly of combining a small country with a large banking system?

A woman and her dog walk past a branch of Banca Privada D'Andorra (BPA) in Andorra la Vella, March 12, 2015. REUTERS/Sergio Perez

Andorra on Monday slapped a 2,500 euros per week withdrawal limit on depositors in Banca Privada d’Andorra (BPA), which it took under state control last week following U.S. allegations that the bank laundered money for international criminal enterprises including Venezuelan gangs defrauding state-owned oil companies.

Spanish BPA subsidiary Banco de Madrid filed for bankruptcy protection on Monday after depositors staged a run.

Andorra, the proverbial tiny principality, this one wedged between Spain and France, is not the first undersized state to see its super-sized banking industry bring it to grief. Banking assets in Andorra are about 6.5 times annual economic output, while its financiers have assets under management on the order of 17 times GDP, both statistics cited by Standard & Poor’s on Friday in cutting Andorra’s credit rating to two levels above junk. S&P cited “uncertainty” over the implications of the BPA affair for Andorra’s banking system and finances.

Other recent examples of ‘banking centers’ to bring down widespread suffering on their smaller hosts include Cyprus, where a rush of Russian and other money distended the banking system, distorted the economy and ended in bank failure, depositor losses and deep recession. Also, of course, we have those financial crisis examples of Ireland and Iceland, both of whom enjoyed the fruits of wild-west banking for a time only to see it end extremely badly.

There is a pattern, and it is this: the bigger banking becomes as a share of output the harder it is to control and the higher the chance that the industry ‘captures’ its host, resulting in corruption, more growth and ultimately disaster.

Andorra, like so many before it, seems determined to hang on to the poisoned fruit, not quite realizing that it is a product of a poisoned tree.

“Andorra has initiated a transformation process and is committed with transparency, international standards of exchange of information and the fight against money laundering ... to preserve our position as a world-class financial center,” finance minister Jordi Cinca told Andorran television.

Note Cinca’s emphasis on remaining a “world class financial center,” whatever that might be. He’d have been far better off investigating a good deal earlier why so many banks, and customers, chose to congregate in a state without a central bank to serve as lender of last resort.


These are not the banks, or customers, you want, and it is no surprise that Andorra, which has long had a large financial sector, has seen its banking assets surge since the financial crisis, or more to the point, since regulation in so many other domains has tightened.

Why do countries allow their financial systems to outgrow their economies? Largely it is in the spirit of bank robber Willie Sutton, who when supposedly asked why he knocked over banks replied, perhaps apocryphally, “Because that’s where the money is.”

Large banking systems create exactly the kind of wealth and opportunity which regulators and politicians are in a good position to exploit. They do so though while creating risks that ultimately will be shared out much more equally, as in Ireland, Iceland and Cyprus.

That wealth and, er, opportunity, when it is spread among the professional and political class in a given small state impairs the will, if not the ability, to regulate toughly enough.

Banking growth doesn’t seem able to drive longer-term sustainable growth.

“The positive relationship between banking depth and economic growth seems to hold at least until the bank-to-GDP ratio gets to about 100 per cent or so,” Governor of the Central Bank of Ireland Patrick Honohan, called in to clean up the mess, said in a 2013 speech.

“But beyond that, there is little evidence of a growth-enhancing function for having a large banking system per se. And rapid growth in a banking system’s credit to the domestic economy has been long known as a risk factor for financial instability.”

And while there are other small country outliers, such as Luxembourg, with very large banking sectors compared to their economy, this isn’t only an ‘offshore’ phenomenon. Both Britain and Switzerland had bank assets nearly five times their economies as of 2012 and Germany weighs in at about three times.

So while small states like Andorra might want to stick to tourism and stamps, there is much here for the bigger banking centers to think about.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at

Editing by James Dalgleish