monitoring of the underlying loan is inefficiently low if a bank frees up regulatory capital by buying a cds. the reason for this is that while the insured originator of the loan has no incentive to monitor, the insurer lacks the control rights. transparency – another weakness in the crt market results from its potential opaqueness. during the past decade, we have experienced a hitherto unique process of credit risk dispersion that had its roots in the us subprime market. the decodification of the actual degree of entanglement is still in progress. in a recently published paper, gary b. gorton gives a very detailed description of the different steps of crt. and he argues that while the interlinking of securities, structures and derivatives made it possible for risk to be spread among many capital market participants, it simultaneously resulted in a loss of transparency as to where these risks ultimately ended up. this loss in transparency meant that market participants did not evaluate their credit risk adequately. in the cdo market, for example, the inherent systemic risk of certain cdo products, such as rmbs on us housing loans, was not taken into account. market participants often relied solely on credit ratings and were attracted by the fact that these loan securities had larger spreads than similarly - rated corporate bonds. the resulting increase in demand for these products boosted their supply and allowed a decline in the quality of the underlying loans. hence, securitisation and the “ originate to distribute ” business model became more and more attractive, which is highlighted by the fact that in 2005 - 06 dealer firms transferred more subprime risk to investors than was originated during this period. in the case of credit derivatives, a further aspect heightens the lack of transparency. the vast majority of these agreements are made over the counter. this not only aggravates the misevaluation of counterparty risk, it also causes an evaluation problem concerning the systemic risk in the cds market. this, in turn, exacerbates uncertainty and loss of confidence among market participants. regulatory arbitrage – in addition, the well - functioning of markets in general is at stake as market participants usually try to find methods to evade regulatory regimes. financial institutions shifting credit risk to off - balance - sheet vehicles was a typical form of such a regulatory arbitrage. in doing so, banks used a loophole in the old regulatory regime, which did not capture these vehicles. this loophole has

andreas dombret : prospects for, and obstacles to, greater proportionality in regulation – a supervisor ’ s perspective speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the second regional banking conference of the state of hesse, brussels, 21 february 2018. * * * 1. introduction ladies and gentlemen i would like to start by thanking you very much for the warm welcome and for inviting me to this event. when i was asked to speak to you here today about the prospects for, and obstacles to, greater proportionality in banking regulation, i jumped at the opportunity – and i did so because this is a topic that is especially close to my heart. let ’ s take a look back : when the debate first started in 2016, i sought to have the bundesbank review whether smaller credit institutions were unduly burdened by regulation. and once we were able to show clear signs of this, i decided that the bundesbank should be quick to turn the debate towards potential solutions. this is all the more important to us because we regard diversity as a key attribute, not only in nature and our society but also in our economy and the banking sector. after all, diversity is crucial to economic development, too – it means increased competition for the best approaches, more choice in decision - making, and greater innovation. today, i have been presented with the task of talking about regulatory proportionality from a supervisor ’ s perspective. as you have already heard what the credit institutions have to say, i need only give a rough overview of the reasons for greater proportionality and the burdens weighing on smaller institutions. instead, i will focus on the prospects for, and obstacles to, greater proportionality, before wrapping things up by outlining what greater proportionality in the eu might look like. 2. why do we need greater proportionality? the arguments in favour of greater proportionality are myriad – you have doubtless spoken about many of the reasons for it at this conference already. and, as far as banking supervisors are concerned, too, there are strong arguments as to why greater regulatory proportionality is needed. now that the financial crisis is over, we have stricter rules and a common european approach to supervision in the form of basel iii and the banking union. these rules are mainly geared towards large banks with international ties, which is not exactly surprising considering these banks were the ones at the epicentre of the crisis. in europe, however