Today, fierce competition is one of the factors that depress returns despite the increase in risks; it might prompt some banks to reduce fees in order to increase their market share. And tomorrow, the credit cycle might reverse and  BIS central bankers’ speeches  3  default rates surge. Such a scenario ultimately raises the issue of default-recognition methodologies. And last but not least, there is also the reputational perspective. By acting as underwriters in leveraged-finance deals, banks also distribute a certain amount of exposure. In 2014, around € billion of leveraged-loan exposures were distributed. Nevertheless, from a reputational perspective and to avoid potential mis-selling practices, the quality of the distributed assets is of the essence. And currently, 21% of exposures retained by banks are covenant-lite, against 74% of those that they distribute. To sum up: banks appear to be increasing their exposure to the growing market for leveraged finance. The leverage levels of borrowers are increasing, while constraints on loan contracts are being removed. As I said earlier on, there is no such thing as a free lunch, and ultimately, it is the task of risk managers to ensure that the price is adequate – risk and return have to remain in balance. Among other things, this requires forward-looking risk assessments, conservative collateral valuations, continuous monitoring of the borrower’s risk profile, and rapid reactions to changing circumstances. Addressing risks – risk management and banking supervision The market environment I just described undoubtedly calls for effective risk management in order to curb potential excess.

And we will consider how to maintain focus as memories fade and the temptation to turn inwards returns. We are doing so because we know that everyone has a shared interest in real markets. Real markets are professional and open. They are resilient, fair and effective, and they maintain their social license. Real markets are not ends in themselves but serve the interests of end-users. Real markets don’t just happen. They depend on private actors and public initiatives to ensure the quality of market infrastructure. That includes ‘hard’ infrastructure, the plumbing of markets that determines the mechanics of markets; and ‘soft’ infrastructure, like standards and codes that define how market participants should behave. Since the crisis, the UK has played a leading role in addressing misconduct in domestic and global markets. 1  See Fair and Effective Markets Review Final Report, HM Treasury, Bank of England and FCA (June 2015). At: https://www.bankofengland.co.uk/report/2015/fair-and-effective-markets-review---final-report  2  All speeches are available online at www.bankofengland.co.uk/speeches  2  We know that the City has a particular responsibility given London’s position as the pre-eminent global financial centre. 2  What has been achieved? So what has been done to re-build the necessary market infrastructures for real markets to thrive? 3  In the UK, laws and regulations have been strengthened by, for example, introducing a criminal regime for manipulating benchmarks. Public authorities know they cannot and should not try to legislate for every circumstance, monitor every transaction, or anticipate every market innovation.