stress that the intelligence work should be properly followed by the establishment of new statistics about shadow banking. various approaches of market intelligence let me explain the efforts of the bank of japan in this respect. the bank monitors shadow banking entities and activities through various channels. the nature and scope of the bank ’ s monitoring are depicted in chart 8. amongst these channels, direct monitoring of major shadow banking entities is of course the most significant. thus, the bank has increased the number of staff directly monitoring major securities companies. however, it is practically impossible to conduct dialogues with all financial institutions of a shadow banking nature, and moreover, shadow banking activities tend to change rapidly with developments in financial markets. it should be noted that shadow banking entities are deeply involved in funding and investment with various financial institutions. so indirect monitoring through banks, monitoring through the payments and settlements system, and market intelligence through market participants all become important. the bank also closely watches shadow banking activities in securitization, securities lending and repos. for instance, we have started direct monitoring of hedge funds and investment trusts as well using market intelligence through market participants much more than before. furthermore, although we do not directly monitor finance companies, since large finance companies are owned by banks, we monitor them by monitoring the banks. it is then crucial to cross - check the information gathered. chart 9 illustrates the point. in this regard, it is important to monitor banks as counterparties of shadow banking entities. this is because bank activities are interconnected with shadow banking activities. market information in the financial markets is also particularly valuable. central banks are especially well - positioned to collect valuable information on the activities of participants in financial markets, since they not only gather information relevant to monetary policy, but they also operate payment and settlement systems. information on market practices and financial innovations can often provide early warning of risks, and hence are especially important among the various kinds of market intelligence. bis central bankers ’ speeches the case in point is found in the subprime mortgage crisis in the united states. securitized products were originated with financial engineering and distributed without appropriate risk assessment. this was partly due to an overly optimistic assessment of risk diversification. however, this risk became increasingly visible in the market as the market evolved into a new phase. feedback of market intelligence another important role of market intelligence is to feed information back to the market, and thus to find potential information gaps to be filled. for example, based on market intelligence, the bank of japan designs and compile

or information acquired through regulatory monitoring. we should be aware of these biases, and good market intelligence is needed to gauge the extent of such bias and to compensate for it. 3. lessons from the past : necessity of proactive market intelligence let me now turn to three examples of central bank intelligence. the first example is its failure in the past. this is the so - called paribas shock of august 9, 2007, the precursor of the global financial crisis of 2008. on july 10, 2007, s & p and moody ’ s announced that they would be reviewing the ratings of several residential mortgage - backed securities ( rmbs ) backed by subprime housing loan assets. as a consequence, the aaa ratings of asset - backed commercial paper ( abcp ) backed by these rmbs would also be downgraded accordingly. this looked like a minor change in a marginal market of the us financial system. unfortunately however, within just one year, it became the epicenter of a global financial crisis. bis central bankers ’ speeches to understand the problem, we should be aware of the special role of money market funds ( mmfs ) in the united states. us mmfs were considered to be extremely safe financial assets. one of the primary reasons for this was that mmfs were only allowed to invest in aaa - rated assets. therefore, when ratings were downgraded for abcp, mmfs did not reinvest in abcp. then, funds that originated abcp and used it to raise money found themselves in fund - raising difficulties : funds under the bear stearns umbrella went bankrupt ; bnp paribas moved to freeze its affiliated funds ’ new applications and redemptions. these funds were the structured investment vehicles ( siv ) created by banks to issue abcp. when these sivs were unable to find funding sources, their parent banks were forced to provide liquidity enhancement instead. at that time, nobody knew for certain which banks ’ sivs were on the brink of extinction, and which banks had serious liquidity problems. banks, which frequently lend each other money, suddenly became aware of counterparty risk, the risk that the other party in a transaction might suddenly go belly up. they began to worry that some bank somewhere might suddenly be unable to secure liquidity and fail. indeed, on august 9, a liquidity crisis actually occurred, with liquidity drying up quickly in the interbank market. many european banks were among those facing liquidity difficulties. chart 1 shows