had been a significant factor in boosting consolidation. the second paper evaluates the fear that the lower on average, risk - based capital charges on loans to small - and medium - sized enterprises by basel ii adopters would put non - adopters at a competitive disadvantage. this study concludes that the empirical evidence suggests that, indeed, a competitive issue in this market might arise between adopters and large bank non - adopters, both of which make the same types of loans in the same markets. this potential effect must be addressed. but the study also concludes that, on the basis of empirical review, the types of small business loans generally made by community banks - relationship - based loans, which community banks do so well - are so different from the types of loans made by larger banks, and so differently priced, that the competitive effects on community banks of basel ii application to large banks are likely to be insignificant. two other studies, exploring the competitive effects in the residential mortgage and credit card markets will be available in the next few months. the results of all four studies will be reviewed when we conduct later this year another quantitative impact study on the revised basel ii now being developed. and, again, if updates of the completed studies or the analyses in the new studies demonstrate competitive problems, we will modify the proposals to address them. summary in summary, the banking system is in a strong and profitable position to finance the credit demands of the current expansion. as that expansion continues, both large and community banks will have to once again look beyond their core deposit base to fund those demands. the competitive environment for banks, especially community banks, will continue to intensify. both history and current behavior suggest, however, that community banks can innovate and meet these competitive challenges. the merger trends of both large and small banks will undoubtedly continue, but both public policy and new entry will also continue to limit concentration in local markets. if evidence shows that a bifurcated application of basel ii would distort competitive markets in the united states, the agencies are pledged to make whatever modifications are necessary to either the proposal or the current capital rules. and, finally, once again : ken, i wish you a productive and enjoyable retirement.

##os ) whose issuance increased sharply in 2018 and has since moderated somewhat. many large banks originate leveraged loans with an intent to distribute, often to clos. while the direct exposures of the banking system in the form of loan portfolios and warehousing exposures can be monitored, there are also indirect exposures, including through bank investments in clos and credit lines, which bear vigilance. by contrast, nonbank exposures are harder for us to track. to date, the default rate on leveraged loans has been at the low end of its historical range, and corporate credit conditions have been favorable, with low interest expenses and low expected default rates. however, if spreads rise sharply or economic conditions deteriorate significantly, we could see downgrades, refinancing challenges, rising delinquencies and defaults, and losses to investors. recognizing that financial imbalances played a key role in each of the past three u. s. downturns, policy should seek to moderate financial vulnerabilities when they are likely to materially exacerbate an economic downturn, leading to deeper declines in output and higher levels of unemployment. both economic theory and econometric evidence point to the risk that excesses in corporate debt markets could amplify adverse shocks and contribute to job losses. overindebted businesses may face payment strains when earnings fall unexpectedly, and they may respond by pulling back on employment and investment. the slowdown in activity lowers investor demand for risky assets, thereby raising spreads and depressing valuations. as business losses accumulate, and delinquencies and defaults rise, banks are less willing or able to lend. this dynamic feeds on itself, potentially amplifying downside risks into more serious financial stresses or a downturn. 3 / 4 bis central bankers'speeches recognizing this feedback loop between financial imbalances and the macroeconomy, in addition to strong through - the - cycle regulatory requirements, our toolkit includes a countercyclical capital buffer ( ccyb ). the ccyb is intended to require the nation ’ s largest banks to build capital when conditions are favorable to sustain resilience for times when there is elevated risk of above - normal losses, which often follows periods of rapid asset price appreciation or credit growth. ccyb requirements are intended to lean against rising risks at a time when the degree of monetary tightening needed to achieve the same goal could be inconsistent supporting