And in some sectors, as lenders seek protection against perceived downside risks, it is probably going further than is necessary to foster financial stability in the long run. But we will end up with a safer, more robust financial system. For banks, a safer and more robust financial system will be characterized by improved risk management that incorporates the lessons from the recent turmoil.
Successful risk management looks comprehensively across business lines and is fully integrated into the decisionmaking of senior management. It identifies stresses and scenarios that might seem remote, but that could threaten safety and soundness. Banks' own self-interest clearly provides a strong incentive to improve risk management, but better risk management at the largest banks would benefit the broader financial system, too.