process. a major step forward in the convergence of supervision in europe can be achieved through the lead supervisor model. as you will know, the lead supervisor model was launched by the european financial services roundtable in 2003 / 2004. under this model, the home supervisor is made responsible for supervision of an entire financial firm, including its foreign subsidiaries, while recognizing the need for an important role for the host supervisor. indeed, in my view the lead supervisor model requires a close working relationship between the host and the home supervisors so as to achieve effective supervision. the home supervisor, referred to as the lead supervisor, is given final authority to set the reporting requirements for the entire group, to coordinate the validation of its internal models at the group and local levels, as well as the planning of on - site bank inspection regimes, and to co - ordinate the authorisation process. the concept of lead supervision promotes greater efficiency. moreover, the lead supervisor model also fits in with the continuous integration – or perhaps i should say globalization – of the financial sector. after all, europe is part of the global financial market, and many large financial players, notably also in the netherlands, have expanded far beyond the european frontiers. dnb believes the lead supervisor model can properly support the interests of market participants, which should be carefully weighed when deciding upon the future architecture of financial supervision in europe. an illustration of how the lead supervisor model can work is the preliminary high level agreement between dnb and the united kingdom financial services authority ( fsa ) regarding the supervisory consequences of a possible merger between abn amro and barclays. in this specific case, we have been able to come to good, pragmatic and transparent agreements. it has been agreed that decisions will be taken on a consensus basis where material issues affecting the combined group are concerned. in the unlikely event that the supervisors do not agree, the lead supervisor, the fsa, will have the final power of decision making. addressing the rise of hedge funds a second challenge facing supervisors today is to deal with concerns that unregulated parties such as hedge funds and private equity constitute a potential source of systemic risk. before i discuss these concerns, let me stress that both hedge funds and private equity have enriched the financial system in many ways. hedge funds provide liquidity and price discovery in many markets and have fostered financial innovation, so facilitating the distribution of risk within the financial system. private equity mobilizes risk - bearing capital for investments in companies and generally

helps to sharpen a company ’ s strategic goals. as such, it is beyond dispute that hedge funds and private equity contribute to the functioning of the economy. in what follows, i am restricting myself to hedge funds. for three reasons there are concerns that hedge funds may exert a destabilizing influence : • the first concern is the potential impact on regulated firms of a sudden collapse of highly leveraged hedge funds. banks and other regulated financial institutions are heavily involved in investing and extending credit to hedge funds. this exposure implies that large losses at one such institution could have knock - on effects for institutions closer to the heart of the financial system. in times of market stress, such effects may even threaten the stability of the financial system, as illustrated by the ltcm case in 1998. there is no certainty that such an event will not happen again. • the second concern relates to market dynamics associated with the potential for large and concentrated positions or " crowded trades " that can seriously amplify market pressures. crowded trades can arise when hedge fund managers take similar investment positions on a large scale. especially in combination with high leverage, this concentration could contribute to price instability if market conditions force hedge funds to unwind their positions simultaneously. • a third concern relates to the intense form of shareholder activism associated with some hedge funds. the prominent role of shareholders today is a direct result of two developments ; the first is the deregulating measures that have been taken in recent years by regulators. the second development concerns the changing corporate governance structure at private firms, including the relaxation of protection constructions. amid the ensuing public debate, regulators and supervisors are being called upon to assess the risks associated with shareholder activism, such as the potential violation of market integrity and uncompromising behaviour with the sole aim of maximizing shareholder value. particularly the latter may have broader financial stability implications in so far as a single - minded pursuit of shareholder maximization may in some cases undermine the stability of, and public confidence in, a financial institution, such as a bank. such institutions do after all also provide a public good, which should be taken into account when deciding upon the future strategy, and which explains why they are subject to supervision. these examples illustrate that hedge funds are generally beneficial but may under certain circumstances have a destabilizing influence. therefore, the call is on those responsible for safeguarding financial stability to ensure that checks and balances are in place to limit the risks these entities pose, while avoiding restrictive measures that may prevent