achieving a sustainable recovery. some measures have already been taken to support sme financing. in july this year the eurosystem recognised the lower risks posed by securities backed by sme loans, taking into account the introduction of the ecb loan level data transparency initiative. in the context of the regular review of its collateral risk control framework, the eurosystem accordingly reduced haircuts on sme abss posted as collateral for its regular monetary policy operations. elsewhere, a number of public initiatives have also been launched at both the national and european levels to ease the credit constraints of smes, for instance through use of public guarantees. even though at this stage of the recovery the supply - side is not the major cause of the continued weak lending data but the weak demand, nevertheless, two key priorities ought to be addressed on the supply - side. the first priority is to support the bank lending channel by strengthening banks – that is, by cleaning up their balance sheets and reducing fragmentation in funding markets. i am confident that banking union will help achieve this, not least through its comprehensive assessment of banks ’ balance sheets. the second priority is to support the bank lending channel by strengthening capital markets. as disintermediation is not an option for most euro area smes, a promising middle way is to increase possibilities for the securitisation of sme loans. this could build a bridge between smes and non - bank sources of finance. let me address each in turn. strengthening banks : the role of banking union the euro area economy is slowly beginning to improve, indeed the latest commission forecasts project 1. 1 % growth for next year. in turn, the demand - side constraints on bank lending should gradually lessen. but at this point, supply - side obstacles could become more of a hindrance, because the recovery will lose momentum if banks cannot fund it. a key objective of banking union must therefore be to remove those supply - side obstacles. there are currently three main obstacles here. bis central bankers ’ speeches the first is a rising number of non - performing loans on banks ’ balance sheets and their slow resolution in several countries. this causes banks to preserve capital and avoid risky new exposures, such as those to smes. the second obstacle, which is related, is low investor confidence in banks ’ asset quality and provisioning. this lack of confidence raises funding costs. this then contributes to higher lending rates for borrowers. the third obstacle is the absence of a unified framework for

cross - border banking groups. the fact that at present liquidity surpluses in some countries cannot be used to fund needs in others creates fragmentation. this structural disconnect means there is greater divergence in bank funding costs and lending rates than is warranted by the underlying economic fundamentals. second, an effective srm should help reduce financial fragmentation linked to the differing fiscal health of sovereigns. this mechanism will ensure that there is a clear cascade of bailin - able liabilities for failing banks and that any discretion in the rules is applied evenly across euro area countries. hence, the funding costs of banks should better reflect their idiosyncratic risk, not the credit risk attached to their sovereigns. bis central bankers ’ speeches strengthening capital markets : the role of securitisation however, it will clearly take some time for these measures to repair the bank lending channel. at the same time, it is unrealistic to expect that smes can widely borrow from nonbank investors, at least in the short - term. this is why i see strengthening capital markets through securitisation as an important complement to bank lending. it bridges the financing needs of smes with the funds of non - bank investors. it also gives those investors access to relatively inaccessible sectors of the economy with the risk and maturity profile that suits them. indeed, the rich potential of abss for customisation allows a precise matching of liabilities – an increasingly important issue in particular for life insurers and pension funds. the sums involved are not trivial : at the end of june 2013 insurers, occupational pension funds, money market funds and investment funds together had assets worth almost 16 trillion euros – that is only a trillion euros less than the sum of euro bank deposits. of course, only a small fraction of these funds could be expected to be allocated towards securitisation. yet, if more were tapped successfully they could provide an important boost to sme financing. 1 the problem at present is that the abs market in europe is weak : investor - placed issuance remains far below the pre - crisis levels and secondary market activity is thin in many segments. if we are to reap the potential gains of securitisation for smes, we need to revive this market. this implies removing some key impediments to its functioning. a first impediment is misperceptions about abss in general. certainly, abss are complex products, involving many entities, legal frameworks