##hypothecation and the risks involved can severely undermine confidence in counterparties. the abs market in europe continuing on the development of a particular shadow banking activity, i would say that a step towards the right direction has been taken as the new regulation supports the abs market ( or securitisation market in generally ) and endeavors to ensure growth, while for example the proposed regulation on structural reform in eu aims to better separate shadow banking from the traditional one. furthermore, it enhances the market discipline, which in turn, provides a decent and solid ground for well - functioning shadow banking system. as the ecb governing council decided in june 2014 to “ intensify preparatory work related to outright purchases in the abs market ( to enhance the functioning of the monetary policy transmission mechanism ) ”, i would also like to say a few words about the abs market in europe and its potential. 3 the current abs market in europe is small and impaired : public issuance of asset backed securities is minimal and the market is shrinking. it is unfortunate as the abs - market has a good potential to contribute to unlocking the europe ’ s credit market, by offering a viable complementary funding source for the real economy, in particular for the sme sector. considering the weakness of the securitisation market, it is obvious that the market is still suffering from the stigma it received when the global financial crisis erupted and the failures of the securitisation market were uncovered. the market suffers from a reputation as a capital arbitrage tool of banks that turned out to be disastrous for financial stability. the stigma is persistent and mutual, even though the european abs market performed relatively well during the crisis compared with the respective american one. another reason behind the small and weak european securitisation market may be the heterogeneity of the european securitisation market, namely the differences in for example lending criteria, banking institutions, rating standards and default laws among the european countries. 4 diminishing these differences would enable a better - functioning european securitisation market. harmonising some standards and enhancing relevant data availability could dispel the risk that banks would off - load bad parts of their balance sheets with securitisation activities. moreover, common rules and standards would support the development of the currently very fragmented market to a pan - european one in a single market spirit. finally, considering the potential role of the abs market in the monetary policy transmission mechanism, a central bank should avoid a situation in

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