mark - to - market triggers, clearly contributed to the disruptions in the loan market, and to the losses experienced by banks and other market participants. when prices came under pressure, calls for additional collateral followed, leading in many cases to the sale of positions that put further pressure on valuations and started the cycle anew. but, at present, a number of indicators, including scoos special questions focused on funding of syndicated leveraged loans, provide little evidence of heavy reliance on such mechanisms, suggesting that the potential for such a rapid and disorderly delevering is very limited. these comforts aside, demand from unlevered investors, presumably “ reaching for yield, ” has persisted in recent months. strong inflows into the asset class have reportedly allowed borrowers to bargain for more attractive loan terms, especially given that many funds catering to retail and other unlevered investors have little choice but to immediately deploy invested funds. manifestations of this dynamic include the reemergence of deals that do not provide investors with the traditional protection of maintenance covenants – so - called covenant lite structures – and of deals financing the distribution of dividends to equityholders, as well as a gradual increase in the levering of the underlying corporate assets by borrowers. none of these developments may, per se, be indicative of unwise or imprudent a “ best efforts ” syndication entails a commitment by the arranging banks for less than the entire amount of financing. if the loan is undersubscribed, the deal may not close or terms may need to be adjusted to induce greater investor demand. bis central bankers ’ speeches lending, and in fact each of these may respond to a perceived need on the part of some market participants. however, the dynamics of competition are very much on display, including the resultant pressures on fund managers to accept and deploy incremental investments, and the pressures on arranging banks to maintain their market share. indeed, these circumstances were recently highlighted to me by market participants. we will therefore continue to watch conditions in the leveraged loan market closely in the coming months, and we will speak out forcefully if we perceive pressures continuing to build. tools for addressing financial imbalances if substantial evidence of financial imbalances on a broader scale were to develop, particularly if accompanied by significant use of leverage, i believe that supervision and regulation should constitute our first line of defense. indeed, in the wake of the crisis, our supervisory process has been significantly modified

##gs with which it operates. for these reasons, the use of monetary policy to address financial imbalances should generally remain a last resort. conclusion the federal reserve is fully engaged in monitoring financial markets for potential imbalances and developing the tools necessary to carry out that task. these ongoing efforts include attempting to recognize early signs of misaligned valuations in asset markets and increases in leverage. at present, we see few indications of significant imbalances, and the bis central bankers ’ speeches use of leverage appears to remain well below pre - crisis levels. that said, i ’ ve noted some recent developments that warrant close attention, including indications of potentially stretched valuations in certain u. s. financial markets and emerging signs that investors are reaching for yield. should broader concerns emerge, i believe that supervisory and regulatory tools, including new macroprudential approaches, rather than monetary policy, should serve as the first line of defense. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches