In the case of Archegos, for example, individual counterparties were not sighted on the total size of the firms’ sizeable and concentrated swap positions, meaning they had imperfect information on which to manage counterparty credit risk. In fact, when margin was called as prices moved against Archegos in March 2021, the firm was forced to liquidate its concentrated positions, further amplifying adverse price movements, through the market channel I just described. The end result was that Archegos could not meet all of its margin calls, and its default left its bank-affiliated prime brokers sharing around $ billion in counterparty credit losses. Just as with LTCM in the late-1990s, the Archegos case highlights how financial strains on leveraged non-bank investors can transmit directly to the large banks at the core of the financial system. And it highlights again that if leveraged investors use several counterparties, overall leverage is hidden from each of them. Banks and CCPs may therefore need to have access to more information on the risk positions and balance sheets of their leveraged counterparties if they to understand fully concentrated and hidden exposures. A second lesson for banks’ and CCPs’ counterparty credit risk management from recent extraordinary events is that the past is not always a good guide for the future. And so they need to be creative in identifying stress scenarios that best illustrate their counterparties’ credit risk and so the conditions under which margin calls might not be met.

The ESCB Banking Supervision Committee has long been working as the interface between the EU central banks and banking supervisory authorities. It combines the macro-level perspective of central banks, which are best placed to monitor ongoing developments in the financial system, with the equally important micro-level approach of the supervisory authorities to provide a joint and comprehensive assessment of the stability of the EU banking sector. Let me also note the importance of having appropriate arrangements at EU level for financial crisis management. Good progress has been made as a result of the recommendations of the Brouwer report. Notably, the Banking Supervision Committee has concluded a Memorandum of Understanding on cooperation and information-sharing in crisis management situations between all central banks and banking supervisors of the EU. Global issues At international level, examples of how effective crisis management and resolution is hindered by the absence of a common legal framework are well documented. However, a common legal framework is only one important element required for the orderly pursuit of international finance. Another would be a  BIS Review 53/2003  5  concrete enforcement mechanism, but this is possibly inconceivable in the context of sovereign states. Indeed, contractual arrangements are increasingly aimed at compensating for the lack of a common regulatory and enforcement framework. The response of the international community to coordination problems includes efforts in crisis prevention and crisis resolution. In the context of crisis prevention, the promotion of international standards and codes is a promising avenue.