were common. banks entered into very large, long duration commitments to fund deals that faced significant regulatory and other requirements before they could close. estimates vary, but when the crisis emerged and liquidity in these markets evaporated, large dealers were left holding roughly $ 350 billion in loans and commitments in their pipelines that they could not sell, and these positions remained on banks ’ balance sheets for a time. as loan values declined an unprecedented 40 percent ( figure 6 ), there were significant mark - to - market losses on these assets, which may have contributed to doubts about the condition of institutions at the core of the system. subsequent default rates were not outsized by historical standards, and recovery rates were in line with past averages ( figure 7 ). of course, the fed ’ s monetary policy eased financial conditions across the economy and enabled the refinancing of many of these loans at lower rates and with issuerfriendly terms. because leveraged loans were generally not held in investment structures that used shortterm, confidence - sensitive funding, these investments were not a principal focal point of runs such as those that plagued mbs funding structures. clos were the largest institutional investors in leveraged loans, holding over 50 percent of loans outstanding. these structures are funded with stable capital, with both equity and debt tranches committed for several years – a longer duration than that of the underlying loans. this picture of the pre - crisis leveraged lending market is one of a sharp decline in underwriting standards and a breakdown of risk management, resulting in a large risk buildup involving many of the g - sibs – something the fed and other regulators want to avoid. leveraged loans may not have been a material cause of the crisis, and leveraged lending alone would likely not have threatened the overall health of the large institutions. but caution on the part of supervisors is certainly understandable here. it is worth remembering that the destructive potential of the subprime mortgage market was not obvious in advance and not fully reflected in real - time measures of balance sheet exposure. in light of that demonstrated uncertainty, since the crisis, supervisors have opted to react earlier and more aggressively to the buildup of risk. let ’ s now turn to post - crisis market conditions, which exhibit both similarities and differences compared with the pre - crisis period. borrowing through leveraged loans by speculative - grade companies has been brisk since 2010, with about $ 800 billion of institutional loans now outstanding ( figure 8 ). over much of

runs that occurred repeatedly during the crisis and clearly increased its severity. third, we now have rigorous, forward - looking capital stress testing that recognizes the dynamic nature of the financial system and guards against the excessive optimism that can build during a credit boom. these three reforms are well advanced and, in my view, have left the g - sibs far stronger than they were before the crisis. together, they significantly reduce the probability of a large bank failure. but they would leave us short of meeting the overriding objective of eliminating the too - big - to - fail conundrum without a fourth reform – a viable resolution mechanism that could handle the failure of these institutions without severe damage to the economy. until recently, no nation has had a way of handling such failures without that degree of damage. for more information, see daniel k. tarullo ( 2014 ), “ liquidity regulation, ” speech delivered at the clearing house 2014 annual conference, new york, november 20. bis central bankers ’ speeches authorities around the world have been working to develop an approach to resolving large financial firms that credibly imposes losses on shareholders and debt holders consistent with the basic tenets of our capitalist system, but does so in a way that protects the rest of the financial system and the real economy from severe damage. the single - point - of - entry approach developed by the federal deposit insurance corporation ( fdic ) in conjunction with other u. s. supervisors is a promising innovation, especially in combination with the recent proposal of the financial stability board to increase the “ total loss absorbency capacity ” of systemically important firms in terms of their total levels of equity and long - term debt. when fully worked out, these new regulatory regimes should permit a large, consolidated entity that owns banks or broker - dealers to continue to function even if the ultimate holding company ceases to be viable and must be recapitalized or wound down. as i said at the outset, these reforms directed at the g - sibs are well advanced. but much implementation remains, including, most notably, addressing cross - border issues associated with the failure of complex global firms. it will take time and continued international cooperation to complete this task. 2 infrastructure : the crisis exposed a number of important weaknesses in the infrastructure of the financial markets – what might be more plainly called the plumbing. reforms aimed at addressing these weaknesses receive less public attention than those focused on the g - sibs, and are in some respects less advanced in their conception