well - known problem of collective action. consequently, it has to be decided carefully whether self - regulation can be sufficient for a well - defined field of finance. what have we learnt? let me now turn to some specific aspects that i consider to be crucial in the learning process that we are currently undergoing. first, i would like to talk about some regulatory issues, asking how we can enhance transparency and market discipline in the securitisation market, financial institutions and hedge funds. then, i would like to focus on the role that monetary policy can play in preventing future financial crises. 3. 1 regulation securitisation – the securitisation market has played a critical role in the financial crisis. prior to the crisis, a lack of transparency in this market aggravated wrong incentives in the originate - to - distribute business model. as credit risk was well hidden in highly structured products, it was easily transferred to other market participants. this in turn increased the incentive to originate credit risk. consequently, credit standards deteriorated, contributing to overheating phenomena such as those seen on the american housing and loan market. the fact that market participants often relied solely on credit ratings and that these ratings did not always capture the credit risk adequately aggravated the situation. once the crisis had begun, the lack of information on the risk profile and profitability of the highly structured products increased the distrust among market participants, thus aggravating the financial turmoil. in order to revive this largely beneficial market, a necessary condition is to restore confidence among market participants by enhancing market transparency. the transparency and quality of credit ratings is definitely one starting point in this process. i would like to stress that credit ratings should never replace the investor ’ s responsibility to evaluate the risk of a financial product. but transparency in the rating process – especially in the segment of often opaque and multilayered structured credit – is a prerequisite for investors to behave responsibly. only a sufficiently transparent rating process that represents negative incentive effects for rating agencies will enable the investors to make informed judgements about the product characteristics as well as the quality of the rating process itself. it should be mentioned in this context that initiatives led by iosco, the international organisation of securities supervisors, point in the right direction. in the course of this month, iosco is expected to report on improvements of transparency provisions in individual codes of conducts of credit rating agencies. another issue at stake is the lack of market standards in the securitisation market. market participants must

##ed there is no incentive for the originator to monitor the debtor. this is what we call moral hazard and what has ultimately resulted in an erosion of credit standards not only in us subprime but also in other credit market segments. in general, the ultimate risk - taker does not have the necessary information to monitor the debtor and the transfer process unnecessarily complicates the default risk assessment of the securitised assets. market discipline – market discipline describes a mechanism in which market participants have an incentive to monitor the risk behaviour of counterparties with the aim of readjusting their investment decisions accordingly. in the aforementioned case of securitisation, the risktaker might be penalised by its share holders and other counterparties if a lack of monitoring impairs his ability to assess credit risk properly. hence, market discipline has the potential to correct inefficiencies arising from credit risk transfer. however, there is a very important prerequisite for market discipline : transparency. only if the market participants recognise that a moral hazard problem is arising will they have the option of adjusting their investment decisions accordingly. while transparency is a necessary condition for market discipline, it is by no means sufficient on its own. in addition, market participants must have the ability and incentive to use the information. especially in times of economic expansion, the incentive to acquire and use the information might be low as the general default risk remains relatively muted as long as the upward trend continues. a restraining effect via market discipline is rather unlikely in this case. therefore, transparency and market discipline can sustain financial stability but they should not replace market regulation. in addition, market regulation itself is necessary for enhancing transparency. self - regulation – in general, there are two possible paths that can be followed with regard to market regulation. regulation can either be imposed on the relevant institutions in the financial sector by regulator agencies or the institutions themselves can willingly agree on regulation. in the second case, we are talking about self - regulation. self - regulation has the advantage that market participants tend to identify with the self - imposed rules, which should result in a higher acceptance of the regulation. moreover, market participants might have better knowledge of the market, leading to more flexible and less costly solutions. however, as the current financial crisis underscores, self - regulation bears the risk that regulation will remain too lax or that the market participants will not comply with the self - imposed rules. this is an example of the