begin by considering how to promote solvency and liquidity, taking into account the unique structures and activities of each type of nonbank. liquidity challenges vary across nonbank firms and activities. in some, the issue is whether a firm can fund itself in a distressed situation. for example, a broker - dealer that relies heavily on short - term wholesale funding may find its funding evaporating at the first sign of trouble – a situation that could force the sale of assets at fire sale prices. one way to mitigate such problems is by having direct restrictions on the structure of liabilities, such as on their duration or on the use of wholesale funding. analogously with banks, one could also imagine requiring some nonbanks to maintain buffers of highly liquid assets that are sized according to the risk that their liabilities will run off quickly in a stress situation. in other nonbanks, withdrawable liabilities are part of the structure of the entity or activity, and what varies is the degree of mismatch between the liquidity of assets and liabilities. for example, some open - ended mutual funds offer daily withdrawal privileges but invest in assets that take longer to sell and settle, giving investors an incentive to withdraw quickly when distress arises. the fire sales of assets that may result can depress asset prices and increase volatility, with knock - on effects on other institutions and markets. concerns have grown about this liquidity mismatch as the aggregate value of less liquid assets in such funds has grown. in part because of this concern, in a december federal register notice last year, the financial stability oversight council ( fsoc ) requested public comment on potential systemic risks posed by asset manager activities and products. to promote solvency, one could impose ratio - type capital requirements, such as leverage ratio requirements or risk - based requirements. an alternative is to require that firms perform regular stress tests to demonstrate that they can remain solvent and continue to lend even under stress. in the fed ’ s case, it has chosen to impose all of these requirements on banks, but these requirements cannot simply be applied, as is, to nonbanks. see gorton and metrick, “ securitized banking, ” in note 4, op. cit. ; jeremy stein ( 2012 ), “ monetary policy as financial stability regulation, ” quarterly journal of economics, vol. 127, pp. 57 – 95 ; robin greenwood, samuel hanson, and jeremy stein ( 2014 ), “ a

##tized pools, spreads of yields on bbb - rated commercial mortgage - backed securities over comparable - maturity swap rates soared, and spreads on aaa - rated tranches of those securities have risen to unprecedented levels. the widening of spreads reportedly reflected heightened concerns regarding the underwriting standards for commercial mortgages over the past few years, but it also may be the result of increased investor wariness regarding structured finance products. cre borrowers that require refinancing in 2008, particularly those with short - term mezzanine loans, will face difficulty in locating new financing under tighter underwriting standards and reduced demand for cre securitizations. in those geographic regions exhibiting particular signs of weakness in real estate markets, for several years we have been focusing our reviews of state member banks and bank holding companies on evaluating growing concentrations in cre. building on this experience, we took a leadership role in the development of interagency guidance addressing cre concentrations, which was issued in 2006. more recently, because weaker housing markets have clearly started to adversely affect the quality of cre loans at the banking organizations that we supervise, we have heightened our supervisory efforts in this segment even more. these efforts include monitoring carefully the impact that lower valuations could have on cre exposures, as well as evaluating the implementation of the interagency guidance on concentrations in cre, particularly at those institutions with exceptionally high cre concentrations or with riskier portfolios. recently, we surveyed our examiners about their assessments of real estate lending practices at a group of state member banks with high concentrations in cre lending. we had two main objectives for this effort. first, we wanted to evaluate the federal reserve's implementation of the interagency cre lending guidance and to determine whether there were any areas in which additional clarification of the guidance would be helpful to our examiners. second, we wanted to assess the degree to which banks were complying with the guidance and gain further information on the degree of deterioration in real estate lending conditions. through this effort, we confirmed that many banks have taken prudent steps to manage their cre concentrations, such as considering their exposures in their capital planning efforts and conducting stress tests of their portfolios. others, however, have not been as effective in their efforts and we have uncovered cases in which interest reserves and extensions of maturities were used to mask problem credits, appraisals had not been updated despite substantial recent changes in local real estate values