the rest of the continent. the case of bulgaria : using growth to save for a rainy day by way of illustration, let me focus on the experience of bulgaria. my country went through a severe banking and financial crisis in 1996 – 1997, when one third of the banks went bankrupt. there was hyperinflation and the confidence in the national currency vanished. that prompted the introduction of a very conservative monetary regime, the currency board, in july 1997. after that, inflation and interest rates went down swiftly and sustainably. since then the bulgarian economy has been growing in an environment of practically non - existent exchange rate risk, with highly flexible labour markets, hard budget constraints and fiscal discipline. the ratio of public debt to gdp fell from 105 % in 1997 to 16 % in 2010. the currency board arrangements are and will be our main anchor of stability and predictability till the euro adoption. irrespective of all electoral cycles, the support for the currency board by the business community, the general public and all political parties has stayed intact. the current crisis started to affect bulgaria towards the end of 2008, with the decline in external demand and the lower capital inflows. however, the banks in bulgaria did not have any exposure to foreign “ toxic ” assets and did not suffer directly from the “ domino effect ” of collapsing financial institutions abroad. the bulgarian case was different from the anglosaxon scenario because we had learned our lessons from 1996 – 1997 and we had accumulated enough reserves to serve as a cushion. to talk in numbers, the government entered the crisis with a fiscal reserve of 12 % of gdp at the end of 2008. the gross international reserves of the bulgarian national bank were 36 % of gdp then. the banking system average capital adequacy was 14. 9 % in december 2008. our banking system has never been a source of problems. engaged in traditional commercial banking, our banks were affected by the crisis only when the general economic activities declined and as a result some of their clients found it harder to service their loans. the banking system itself withstood the crisis, displaying outstanding soundness and stability. but this did not happen on its own, neither was it simply due to the presence of reputable names on our market. we, the bnb, as supervisors have always believed that the good times with strong growth must be used to “ save for a rainy day ”. the consistent countercyclical policies of the bis central bankers ’ speeches bulgarian national bank played a

for the very first time ever. as soon as the new rules are finally in place, banks will be much more stable. yet rules are merely the foundation of a stable banking system. someone also has to ensure that the rules are applied – that is a matter for banking supervisors. and, with regard to europe, a further element enters the scene : the banking union. in early october, the eu economic and finance ministers formally agreed to establish a single supervisory mechanism ( ssm ) as the first pillar of the banking union. the ssm is scheduled to start its work in november 2014. joint supervision will make it possible to supervise banks everywhere according to the same high standards. that will prevent regulatory arbitrage. at the same time, it will prevent a situation in which a purely national supervisor unwittingly cuts domestic banks too much slack without any justification. the banking union is unquestionably the largest european project since the introduction of the euro. we should therefore exercise particular prudence when implementing it. this includes initially conducting a careful and comprehensive review of the state of the european banking system. this inventory has already begun, and it will ensure that all legacy problems are disclosed prior to the introduction of the ssm. the time schedule for the banking union project is certainly ambitious, but i am confident we will be able to keep to it. however, neither better rules nor a single supervisor can prevent individual banks from becoming distressed. and that is also a good thing : the possibility of failure is a cornerstone of a market economy. it must, therefore, be possible for banks to fail without rocking the entire financial system. looking at our vicious circle, this leads us to the question of how we can protect sovereigns from banks ’ distress. 5. 2 protecting sovereigns from banks ’ distress we are ultimately discussing a problem which already became relevant in the 2008 financial crisis : that of “ too big to fail ”. banks can become so large or so highly interconnected that bis central bankers ’ speeches their failure can jeopardise the stability of the entire financial system. the collapse of lehman brothers showed us all what that can mean. in order to prevent the financial system from collapsing, governments can be forced to rescue large banks in an emergency – also using taxpayer funds. that not only weighs on public budgets but gives banks distorted incentives. it encourages them to take greater risks. it is like the toss of a coin : heads, the bank wins ; tails, the taxpayers lose. finding a