, including robust capital, liquidity, and risk - management requirements, to address and mitigate systemic risks. enhanced requirements, particularly for large, interconnected firms, are needed not only to protect the stability of individual institutions and the financial system as a whole, but also to counteract any incentive for financial firms to become very large in order to be perceived as too big to fail. this perception can materially weaken what should be the normal market incentive of creditors to monitor the firm's risktaking and appropriately price these risks in their transactions with the firm. when this incentive is weakened, moral hazard increases, allowing the firm to raise funds at a price that may not fully reflect the firm's risk profile. as a result, the firm is likely to choose a level of risk that is excessive both for itself and, potentially, for society at large. moreover, this distortion creates a playing field that is tilted against smaller firms not perceived as having the same degree of government support. development of a mechanism for the orderly resolution of nonbank financial firms that threaten financial stability, which i will discuss later, is an important additional tool for addressing the too - big - to - fail problem. the discussion draft would reinforce the changes in supervision already under way at the federal reserve and the other banking agencies. as already announced, we have strengthened capital requirements for trading activities and securitization exposures. we continue to work with other regulators to strengthen the capital requirements for other types of on - and off - balance - sheet exposures and to improve the quality of capital overall. 1 beyond these generally applicable capital requirements, we must develop capital standards and other supervisory tools addressed specifically to the systemic risks of large, interconnected firms. one possible approach is a special charge – possibly a special capital requirement – that would adjust based on the risks posed by the firm to the financial system. ideally, this requirement would be calibrated to become more stringent as the firm's systemic risks increase, although developing a metric for such a requirement would be highly see bank for international settlements ( 2009 ), " basel ii capital framework enhancements announced by the basel committee, " press release, july 13 ; and basel committee on banking supervision ( 2009 ), enhancements to the basel ii framework ( basel, switzerland : basel committee, july ). challenging. another potentially promising option is to require that selected financial institutions issue specified amounts of contingent capital. such capital could take the form of debt instruments that convert to common equity

in an economic downturn, widespread downgrades of these low - rated investmentgrade bonds to speculative - grade ratings could induce some investors to sell them rapidly - - for instance, because lower - rated bonds have higher regulatory capital requirements or because bond funds have limits on the share of non - investment - grade bonds they hold. this concern may be higher now than in the past, since total assets under management in bond mutual funds have more than doubled in the past decade to about $ 2. 3 trillion this year. these funds now hold about one - tenth of the corporate bond market, and the redemption behavior of investors in these funds during a market correction is unclear. bond sales could lead to large changes in bond prices and overall financial conditions if technological, market, or regulatory factors contribute to strains on market liquidity - - a possibility that has been relatively untested over the course of the expansion. - 7further down the credit quality ladder, there has been sizable growth in leveraged lending, accompanied by a notable deterioration in underwriting standards. net issuance of debt to risky borrowers, which had stopped growing in late 2016, rebounded over the past year. leveraged loans outstanding rose about 12 percent over the past 12 months and now stand around $ 1 trillion overall. 4 while leveraged loans have traditionally had important investor protections, loan covenants for new leveraged loans have weakened dramatically. covenant - lite, or covlite, transactions now represent roughly 80 percent of the entire leveraged lending market - - up from less than 30 percent a decade ago, when they were associated primarily with stronger borrowers. deals increasingly involve features that increase opacity and risk, such as less subordinated debt ; “ ebitda ( earnings before interest, taxes, depreciation, and amortization ) add backs, ” which could inflate the projected capacity of the borrowers to repay their loans ; and “ incremental facilities, ” which allow additional borrowing that is of equal seniority with the existing bank loan. 5 the share of newly issued large loans to corporations with high leverage ( debt to ebitda ratios above 6 ) now exceeds previous peak levels observed in 2007 and 2014 ( figure 8 ). previously, much of this deterioration in underwriting appeared to be concentrated among nonbank lenders, but this year has witnessed a deterioration in underwriting at the largest banks. estimates vary. the estimate of about $ 1 trillion in the board ’ s financial stability report