monetary tightening needed to achieve the same goal could be inconsistent with sustaining the expansion. and countercyclical capital requirements build resilience, unlike monetary policy. second, the banks that are subject to the ccyb could achieve a modest buffer simply by safeguarding the capital they have built up or by reducing payouts moderately. third, the ccyb is a simple, predictable, and slow - moving tool that applies equally across all large banks. it does not single out shortfalls in particular banks or result in hard - to - predict volatility in individual banks ’ stressed capital requirements. finally and critically, the additional capital implied by the ccyb across the system can be released when conditions deteriorate to ensure the ability of large banks to lend into a downturn. a number of countries have raised their ccyb setting above zero, and we can learn from their experiences, which have generally been positive. 13 conclusion our job now is to sustain the expansion by maintaining the economy around full employment and inflation near target. recent history suggests that the business cycle and see board of governors ( 2016 ) and brainard ( 2018a and 2018b ). basel committee ( 2018 ) reports the setting of the ccyb across countries. - 14 the financial cycle are increasingly intertwined. if history is any guide, as resource utilization continues to tighten, there is some risk that financial imbalances could grow. the u. s. financial system is much more resilient than before the crisis, owing importantly to strong financial reforms. even so, the banking system ’ s core capital and liquidity buffers have yet to be tested through a full cycle. at the same time, the appetite for risk among financial market participants rose notably over 2017 and much of 2018, and corporate borrowing has reached new heights amid rapid growth and deteriorating underwriting standards in riskier segments, such as leveraged lending. the mutual funds that have built up exposure to some of this risky debt have liquidity mismatches that could contribute to market dislocations in stressed conditions. this constellation of vulnerabilities could amplify adverse shocks that might materialize. at a time when cyclical pressures have been building and bank profitability has been strong, it might be prudent to ask large banking organizations to fortify their capital buffers, which could subsequently be released if conditions warrant. - 15 references bank of england ( 2018 ). financial stability report. london : boe, november

in an economic downturn, widespread downgrades of these low - rated investmentgrade bonds to speculative - grade ratings could induce some investors to sell them rapidly - - for instance, because lower - rated bonds have higher regulatory capital requirements or because bond funds have limits on the share of non - investment - grade bonds they hold. this concern may be higher now than in the past, since total assets under management in bond mutual funds have more than doubled in the past decade to about $ 2. 3 trillion this year. these funds now hold about one - tenth of the corporate bond market, and the redemption behavior of investors in these funds during a market correction is unclear. bond sales could lead to large changes in bond prices and overall financial conditions if technological, market, or regulatory factors contribute to strains on market liquidity - - a possibility that has been relatively untested over the course of the expansion. - 7further down the credit quality ladder, there has been sizable growth in leveraged lending, accompanied by a notable deterioration in underwriting standards. net issuance of debt to risky borrowers, which had stopped growing in late 2016, rebounded over the past year. leveraged loans outstanding rose about 12 percent over the past 12 months and now stand around $ 1 trillion overall. 4 while leveraged loans have traditionally had important investor protections, loan covenants for new leveraged loans have weakened dramatically. covenant - lite, or covlite, transactions now represent roughly 80 percent of the entire leveraged lending market - - up from less than 30 percent a decade ago, when they were associated primarily with stronger borrowers. deals increasingly involve features that increase opacity and risk, such as less subordinated debt ; “ ebitda ( earnings before interest, taxes, depreciation, and amortization ) add backs, ” which could inflate the projected capacity of the borrowers to repay their loans ; and “ incremental facilities, ” which allow additional borrowing that is of equal seniority with the existing bank loan. 5 the share of newly issued large loans to corporations with high leverage ( debt to ebitda ratios above 6 ) now exceeds previous peak levels observed in 2007 and 2014 ( figure 8 ). previously, much of this deterioration in underwriting appeared to be concentrated among nonbank lenders, but this year has witnessed a deterioration in underwriting at the largest banks. estimates vary. the estimate of about $ 1 trillion in the board ’ s financial stability report