undertook an important survey on crt activity. but so much has happened since then – especially in terms of the substantial growth of the market and the increasing participation of hedge funds in taking on credit risk exposures – that at the current juncture, the available data are insufficient to make a sound assessment of these risks. should current trends continue, they will imply fundamental changes in the methods for assessing the ability of the financial system to cope with unexpected credit cycle deterioration. after the finalisation of the june 2006 fsr, some hedge funds endured financial losses, mainly as a consequence of turbulence in financial markets during may and june. subsequently, there were some highly publicised adverse developments in the hedge fund sector related to the collapse of amaranth advisors, a large multi - strategy fund. nevertheless, the hedge fund sector continued to benefit from steadily increasing investor demand. [ see slide 6 ] capital under management by hedge funds has been growing very rapidly and has reached close to one trillion us dollars. [ see chart on the left of slide 6 ] given this size of the sector, a growing concern is that trades are becoming increasingly crowded. higher correlation of hedge fund returns could be an indication of this. during the first half of 2006, correlations among and within hedge fund strategies remained relatively stable. it is noteworthy that the collapse of amaranth advisors in september did not lead to wider turbulence, despite the fact that the total loss experienced by the fund was much larger than that incurred by ltcm in 1998. the ability of the system to absorb the shock demonstrated that the hedge fund sector has become more mature and has the ability to repair itself in the event of idiosyncratic distress. however, it should also be recalled that this event occurred against a backdrop of rather benign market conditions, and it cannot be excluded that in a more challenging market environment, such as that which characterised markets after the russian crisis in august 1998, the impact of such an event could have been more disruptive. new risks have emerged related to what could be called a “ triangle ” of vulnerability connecting the state of the credit cycle ( which could deteriorate in the future ), credit derivatives and hedge funds [ see slide 7 ]. on the one hand, a marked adverse turn in the credit cycle, triggered either by a large and unexpected credit event, such as the collapse of a large corporation, or by a cluster of defaults by smaller and highly leveraged low - quality corporations, could lead to substantial payment obligations for counterpart

( smp ) presently amounts to somewhat more than 60 billion euros, which again equates to 3 %. there is no evidence that asset purchases have had any significant impact on average euro - area sovereign bond yields on which euro - area monetary policy must exclusively focus as its main transmission channel. but the smp risks blurring the different responsibilities between fiscal and monetary policy. as the risks associated with the smp outweigh its benefits, these securities purchases should now be phased out permanently as part of our non - standard policy measures. 3. current and future challenges for monetary policy 3. 1 exit from exceptional policy measures the challenge facing monetary policymakers now and in the near future is to get the timing and sequencing of the exit from stimulus measures right. this applies to both the nonstandard measures as well as the monetary policy stance, and therefore, key interest rates, as the two dimensions of the exit. while we are far from declaring the crisis over, it would be unwise to postpone relevant considerations to the end of the crisis. as regards the eurosystem ’ s set of non - standard policy measures, these were designed with exit considerations in mind. the overwhelming majority of measures can therefore be easily withdrawn whenever we deem it necessary. as regards the two dimensions of exit consisting of phasing - out non - standard liquidity measures and normalizing our clearly expansionary policy stance, there are risks both in exiting too early and in exiting too late. i believe the latter are greater than the former. for example, maintaining the accommodative policy stance for too long may risk a de - anchoring of inflation expectations, which is costly to reign in. for the time being, however, the policy stance remains appropriate, since inflation risks remain low over the policy - relevant horizon. the two dimensions of exit are independent and separated by concept. thus, a normalization of key interest rates could in principle start before the phasing - out of nonstandard measures has been finished. the phasing - out of non - standard measures mainly depends on the situation in the financial markets and the interbank money market, in particular. while improved conditions enabled us to embark on a gradual phasing - out of exceptional policy measures at the end of 2009, renewed financial market tensions in early may forced us to reintroduce some measures that had already been phased out. looking ahead, the situation in the financial markets shows continuing signs of normalization –