regular banks, this might give a misleading signal to the market that they implicitly also enjoy a similar safety net. formal surveillance by authorities can also reduce the incentives of outsiders to monitor shadow banking entities. shadow banking entities have to earn the trust of investors and counterparties on their own merits. they have to be able to compete independently by prudently managing the business and maintaining sufficient buffers. appropriate disclosure of information and sufficient transparency of operations enable efficient monitoring and are instrumental in building trust. esrb ( 2014 ) is the eu overbanked? reports of the advisory scientific committee 4. bis central bankers ’ speeches secondly, in spite of our best efforts, supervisors tend to follow a step or two behind the actions of those we supervise. this is the case also with regular banks, which operate in and adjust to a continuously changing environment. still i would argue that the banking business is more stable. moreover, there are more similarities across regular banks than there are across the heterogeneous group of shadow banking entities, making regular banks easier to supervise. thus regulating and supervising the shadow banking system might be particularly challenging, if not even impossible. a better option might be to make sure they have the right incentives to do their job well. regulating systemically important shadow banking entities and the importance of separation between the regular banking and shadow banking system however, there are some exceptions to the ideal situation i have tried to picture, making more comprehensive and stricter regulation warranted. first of all if a shadow banking entity becomes systemically important its failure may have devastating effects on the rest of the financial system and eventually on the real economy. as some risks are likely to shift to the shadow banking system due to the tighter regulation in the regular banking sector, risk concentrations may very well be built up in the shadow banking system. there is an externality that calls for regulation. here the us has taken the lead and already allows the authorities to ensure that the perimeter of prudential regulation can be extended as appropriate to cover systemically important ( and significant ) shadow banking institutions. 2 this avenue is one option to be considered in europe. secondly, the systemic risk building up in the shadow banking system and the failure of a shadow banking entity should not cause contagion to the regular banking sector. thus there is a need to regulate and supervise the link between the regular banking sector and the shadow banking system. much has already been done to this end. for example the risk retention rule guarantees that an originator has

rasheed mohammed al maraj : fighting financial crime speech by his excellency rasheed mohammed al maraj, governor of the central bank of bahrain, at the cbb - french embassy training seminar on aml / cft, manama, 28 march 2007. * * * madame ambassador, ladies & gentlemen, good morning : it gives me great pleasure to welcome you all here this morning, to what promises to be an instructive and important training event. let me start by thanking personally her excellency the french ambassador, madame malika berak, for her presence here today and her embassy's assistance in facilitating this event. we very much value the contribution made by various french institutions in bahrain's financial sector, and this seminar marks a further development of our strong relations in the financial field. a special acknowledgement in this respect ought to go to bnp - paribas, who are supporting this event financially, as well providing a speaker. let me thank also the various other presenters taking part in this event, particularly those who have travelled from overseas, for contributing their valuable time and expertise. financial crime of course is an international phenomenon, which requires a coordinated international response. it is appropriate, therefore, that we come together in events such as these and share our experiences. the informal contacts and collaborative working relationships that are developed during these events can be of great help as we work collectively to combat financial crime. it may help set the scene if i say a few words about our approach in bahrain to anti - money laundering, and what i see as the principal challenge that we face a€ “ some of what i am about to say will no doubt apply equally elsewhere in the region. first, the government of bahrain views the application of international standards as critical to the success of the kingdom as a commercial and financial centre, and this basic premise has underpinned our efforts in the aml field as well, where we believe we have achieved a fair measure of success to date. over the past two years, significant efforts have been made in updating our aml framework. for instance, we have updated our existing aml law ; updated our aml / cft banking regulations ; introduced new requirements for insurance and investment firms ; and introduced an inspection regime for designated sectors and professions outside of financial services. internationally, we worked hard to support the establishment of the mena - fatf, and are now honoured to host its secretariat in bahrain. having strengthened our framework to