increasing share of their wealth to vehicles that were managed or advised by professional asset managers. at the same time, advances in the technology of modeling, pricing, and trading of risk over the past several decades gave added impetus to the migration of credit to securities markets. competition from the securities market has significantly affected all segments of banking, but the most dramatic changes have occurred at the very largest banks. one could say that their strategic response was, " if you can't beat them, join them. " freed from the constraints of the glass - steagall act by incremental regulatory changes that were expanded and codified in the gramm - leach - bliley act of 1999, the very largest banking organizations have michael gibson and patrick parkinson, of the board's staff, contributed to these remarks. the views expressed in these remarks are my own and do not necessarily reflect those of my colleagues on the board of governors. significantly increased their capital markets businesses, including arranging and underwriting securitizations, securities custody, prime brokerage, and both over - the - counter and exchange - traded derivatives. they have also made significant inroads into both traditional asset management and the management of hedge funds. indeed, the largest commercial banks are now major competitors in many of the business lines that were historically viewed as the province of investment banks. together, the very large commercial and investment banks have become indispensable to the efficiency and stability of the securities markets. for example, the $ 2 trillion hedge fund sector is critically dependent on a relatively small number of commercial and investment banks that serve as secured creditors and derivatives counterparties. and, as the financial market turmoil has revealed, banks provide liquidity support to various short - term financial markets, including the commercial paper market and markets for various types of tax - exempt debt. competition from securities markets has also affected smaller banks significantly, though less dramatically than larger banks. for example, the portfolio share of commercial real estate loans, which are not amenable to standardization and therefore are difficult to securitize, has increased markedly. setting aside the 100 largest banks, the share of commercial real estate loans in bank loan portfolios nearly doubled over the past 10 years and is approaching 50 percent. the portfolio share at these banks of residential mortgage and other consumer loans, which are more readily securitized, fell by 20 percentage points over the same period. the implications for financial stability from the recent market turmoil the changing business of the largest

and that trading conditions in markets might not always be highly liquid led to an underpricing of both credit and liquidity risks. at the other end of the originate - to - distribute chain, a good part of the risk associated with the securitization of subprime mortgages was not distributed into the market but was retained by banks. the most glaring example is their exposures to super senior tranches of collateralized debt obligations ( cdos ) that had invested in subprime mortgage - backed securities. super senior cdo tranches – the last to bear the costs of defaults on the underlying mortgages – were considered to be extremely safe investments, and little of the risk of these instruments was truly distributed into the market. three things hindered the distribution of super senior cdo risk. first, underwriters sold some of the risk to off - balance - sheet vehicles, but they also provided explicit or implicit liquidity backstops to the vehicles. much of this risk came back onto banks'balance sheets when liquidity pressures emerged in the second half of last year. second, underwriters chose to retain some of the super senior exposure, in some cases reportedly because they met some resistance when they attempted to sell them at very slim spreads. the underwriters evidently misjudged the risk of those positions, in some cases because they relied too heavily on external triple - a ratings. third, underwriters hedged some of the risk with monoline financial guarantors. but some of the guarantors took on so much subprime - related risk that their financial condition had become highly correlated with the performance of the subprime mortgage sector, which has called into question the effectiveness of those hedges. as i mentioned earlier, the growth of securitization is in large part a response to the growing demands of institutional investors for fixed - income securities. these investors clearly had a financial incentive to do better due diligence on the subprime risks they were taking on, but they largely failed to do so. we can only speculate as to why this was the case. i see three possibilities : first, they underestimated the potential for a nationwide decline in house prices ; second, they relied on credit - rating agency analyses that have proven to be inadequate ; or third, they simply misunderstood the risk of these often very complex securities. the complexity of cdos is one example of a widespread increase in the complexity of the capital market activities