by the capital surplus above the regulatory requirements and buffers ; profitability, measured by the amount of profit of bgn 1. 7 billion, guarantees a return on assets and capital, and is a serious source of internal support for balance sheets if necessary. in this context, the main challenges facing the banking sector to date can be summarised along three lines : the dynamics of the macroeconomic environment, the pro - cyclical behaviour of banks, and the potential risks to their profitability. the macroeconomic environment, as i noted at the beginning, is characterised by high uncertainty and the potential for escalation of risk scenarios. this implies the continuation of stress tests for the banking sector with various hypothetical negative scenarios. the banks'pro - cyclical behaviour is associated with continued credit growth. under upward credit dynamics, the capacity of borrowers to service their obligations is sometimes overestimated. that is why the supervisory policy will continue to aim at ensuring that credit institutions act conservatively. 3 / 5 bis - central bankers'speeches the profitability of the banks is put at risk along two lines simultaneously. first, due to the need to set aside additional provisions under a growing probability of non - performing loans ; and secondly, due to limitation of the banks'scope to generate income from core activities. for example, rising interest rates carry the risk of negative revaluations in banks'balance sheets. under these conditions the bnb will continue to follow a conservative prudential policy aimed at further strengthening the capital position of banks through a series of microand macro - prudential measures. therefore, at least in the short term, we see no reason to relax our prudential policy. the path to the euro area the path to the euro area has the potential to become a catalyst for processes that consolidate the political and macroeconomic framework. we have already witnessed such beginnings. most recently, the parliament adopted a decision with a near - constitutional majority to speed up the process of preparing for the introduction of the euro with a target date of 1 january 2024. it is difficult to find another topic today that receives such impressive political support. the fulfilment of the nominal, so - called maastricht, criteria – a mandatory condition for joining the euro area – implies the implementation of policies that are good for the country, even outside the context of the euro area, and thus would help to consolidate the macroeconomic framework. these policies are aimed at curbing and reducing inflation

structures that proved far from risk - free. at the extreme, the business models of some institutions were wholly reliant on the continuous availability of markets for securitized assets ( e. g., northern rock ). the global financial crisis exposed the fundamental incentive problems that can occur with securitization. in the originate - to - distribute model, the incentives of the originating institution were no longer aligned with those of the risk - holders. once that relationship was severed, the standards for new loans and their ongoing monitoring were adversely affected. however, pricing and risk management did not reflect these changes until they were abruptly adjusted, helping to trigger the onset of the crisis. third, many retail and commercial banks expanded into investment banking. this allowed banks to package traditional lending with higher value - added agency business, marketmaking activities and, increasingly proprietary trading. banks'push into markets helped spur the proliferation of over - the - counter derivative products, which created counterparty and investment risks that were difficult to identify and control. incentive problems also plagued this transition. in many banks, a culture that rewarded innovation and opacity over risk management and transparency eventually undermined its creators. senior managers and shareholders of banks discovered that actual risks were much greater than originally thought. by that time, the more junior traders who had assumed the risks had already been paid, largely in cash. many large, complex institutions learned too late that there can be principal - agent problems within firms, as well as between firms and their shareholders. just as banks began doing what markets traditionally did best, there was an explosion in highly specialized products that required monitoring and continuous access to funding liquidity. more and more of the traditional functions of banks – including maturity transformation and credit intermediation – were conducted through a broader range of intermediaries and investment vehicles, which have been collectively referred to as the " shadow banking " system. shadow banks included investment banks ( in other countries ), mortgage brokers, finance companies, structured investment vehicles ( sivs ), hedge funds, and other private asset pools. the scale of these developments was remarkable. during this decade, banking assets grew enormously, to anywhere from one and a half times to six times national gdp in canada, the united states, the united kingdom, and europe. in all countries besides canada, much of this growth was financed by increased leverage. 3 in the final years of the boom, when complacency about access to liquidity reached its zenith, the