is also still unclear. there is no implied criticism here – re - designing the regulatory frameworks for, among others, banks, insurance companies and rating agencies, takes time, and a lasting, well - planned robust set of regulations that will stand for many years to come is surely preferable to a hastily - agreed but inadequate framework. the authorities nationally and internationally are pushing the agenda hard to come up with the right decisions as quickly as possible. the progress of the regulatory agenda has, however, created additional uncertainty in financial markets which is reflected in investor behaviour and in some market prices. for example, market intelligence suggests that it is one of the factors contributing to the continued elevated funding costs for many banks. in due course, the various regulatory initiatives will produce detailed rules. as that happens one can expect a variety of reactions. on one level, there is likely to be some shift of activity between markets and business models as participants evaluate where the new rules establish new incentives. beyond that, there might well be some general improvement in market functioning, reflecting the reduction in regulatory uncertainty and the more resilient financial system that the regulatory agenda is designed to deliver. at the moment, market intelligence suggests that market participants are focussed on the elevated uncertainty and have not yet anticipated the benefits of, for example, a safer banking system. conclusion financial markets have come a long way since the epicentre of the crisis in 2008, with many markets that were significantly impaired in the crisis now functioning well. that progress is encouraging in terms of financial stability and support for the real economy, but further healing is still required. looking ahead, there are some clear obstacles to that process. the sovereign debt crisis, currently focussed on the euro area, is one. and the general recovery in the macroeconomic outlook is another. there will also be a lot of uncertainty embedded in markets until final details are available on the majority of the regulatory agenda. that agenda must be allowed to take sufficient time to get the right answers, but as these become available we should expect to see further improvements in market functioning. meanwhile, the authorities will need to pay particular attention to the next rounds of financial innovation, especially given the prolonged low interest rate environment. bis central bankers ’ speeches

##stream and bank calculations. ( a ) shows the difference between actual and estimated equilibrium spreads as a percentage. positive numbers represent overvaluation, negative numbers undervaluation. ( b ) equilibrium corporate bond spreads are defined as the total estimated credit component plus a five - year rolling average of the illiquidity premia. full details of the approach used for the decomposition of corporate bond spreads can be found in churm, r and panigirtzoglou, n ( 2005 ), “ decomposing credit spreads ”, bank of england working paper no. 253. the bank ’ s model - based estimates suggest that us high - yield and investment grade corporate debt currently reflect historically low risk premia, and so may be vulnerable to a correction ( chart 14 ). moreover although much of the recent issuance reflects refinancing of existing bonds or loans ( with companies seeking to lock in low interest rates and extend maturities ) and m & a activity, there have also been growing reports of us issuance to finance “ dividend recapitalisations ” ( where debt is issued to pay special dividends ). issuance of covenant - lite leveraged loans ( which include fewer of the usual protective covenants for the benefit of the lending party ) was $ 34bn in the first five months of 2011, compared with $ 8bn in the whole of 2010. and us contacts have reported renewed issuance of bonds with payment - in - kind ( pik ) toggles ( where issuers have the option of deferring cash interest payments, choosing instead to roll interest payments into additional debt securities ). although the incidence of these sorts of deals remains significantly below that associated with the pre - crisis exuberance, these examples might be indicative of the reach for yield / assets encouraging investors to chase returns via higher risk assets. despite the low - yield environment, market contacts have been telling us that some investors ’ expectations of returns were little changed by the crisis, reflecting a combination of investor inertia and the need to earn sufficient returns to cover their liabilities. but we also hear that investment horizons are often shorter and tolerance of volatility and desire for leverage is lower. something clearly has to give here – investors know – and must remember – that there is no such thing as a free lunch, and that additional return involves additional risk. the bis central bankers ’ speeches macro - prudential concern is that the reach for yield encourages financial innovation and growth in