Dimitar Radev: Bank supervision and resolution within the Single Supervisory Mechanism and the Single Resolution Mechanism Publication by Mr Dimitar Radev, Governor of the Bulgarian National Bank, in the Quarterly Bulletin of the Association of Banks in Bulgaria, issue 62, October 2020. * * * As of 1 October 2020, Bulgaria joined the Single Supervisory Mechanism (SSM) by establishing close cooperation between the Bulgarian National Bank (BNB) and the European Central Bank (ECB). The accession to the SSM comes as a result of Decision (ЕU) 2020/1015, made by the ECB on 24 June 2020. With its accession to the SSM, Bulgaria also joined the Single Resolution Mechanism (SRM). The SSM and the SRM are the two currently operating blocks of the so-called Banking Union in the euro area. Accession to the Banking Union was a precondition for the inclusion of the Bulgarian Lev into the Exchange Rate Mechanism (ERM II). 1. Participation in the Single Supervisory Mechanism The SSM is the name of the banking supervision system in the euro area. It comprises the ECB and the national supervisory authorities of participating Member States. Applicable to Member States outside the euro area is the so-called regime of close cooperation between the relevant national supervisory authority and the ECB – the mechanism established for Bulgaria. The main objectives of the SSM are to ensure the safety and soundness of the European banking system, to enhance financial integration and implementation of consistent supervision.
Why didn’t the markets and clearing institutions react to the large build-up of risk? And why didn’t the lenders adjust their margin calls to correspond to the risk concentration? Better disclosure of Amaranth’s risk profile, from the authorities, the markets, the clearing institutions and individual lenders would probably have increased the chance of detecting the risk positions being built up. Conclusion New financial crises will occur and hedge funds, which have become an integral part of the modern financial markets, will probably be involved. The large capital flow to the sector has meant, not unexpectedly, that profitability has declined and it is not unreasonable to expect that a number of funds will consequently be forced to close down after more or less substantial losses. However, the advantages of the hedge funds’ operations exceed the risks from a welfare perspective. The Riksbank’s view as regards further regulation is that the focus should be on the hedge funds' counterparties - particularly the systemically-important banks - being able to manage their risks. Improving the banks’ risk management with regard to hedge funds has been the objective of a number of initiatives by the Basel Committee on Banking Supervision and other organisations ever since the LTCM crisis in 1998. From a stability point of view, the central issue is that the systemically-important banks should manage their counterparty exposures correctly – take sufficient collateral, have appropriate limits and be capable of managing potential liquidity problems. The arguments for further regulation of hedge funds are in this context weak.