•  We are working to encourage firms to proceed with their investments in greater resilience and geographic range called for in the Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System. •  We continue to encourage efforts to strengthen all aspects of our national payments and settlement systems. •  And we are engaged across a number of fronts internationally to provide a more integrated framework of supervision that better matches the integration of national financial systems and the increased global reach of the largest financial institutions. As part of our supervisory process we monitor closely the evolution in risk management practice across a broad array of financial institutions. Through horizontal reviews that focus on specific dimensions of risk management, we have a reasonably good sense of where the frontier in risk management practices is across the industry, and understand where the gap between this frontier and average practice is the greatest. The size of this gap in practice can increase in market conditions where competitive pressures and a search for return works to erode discipline. I thought it might be useful to highlight some of the areas where leading practice is farthest ahead of typical practice. Leading practice does not imply that there is a definitely superior model that we expect all firms to converge to over time. In most of these areas, there is some diversity in what defines the frontier of excellence.
The most advanced approaches are able to assess the impact of rate, spread and implied volatility movements under multiple scenarios in both normal and stressed market conditions. These institutions also strive to achieve a balance between shorter term earnings impacts, and the longer-term preservation of economic value. •  Liquidity risk: Similar evolution has occurred in liquidity management with leading practice now subjecting dynamic cash flow projections to a range of adverse scenarios relevant to the risk profile of the firm (such as a sustained loss of access to funding or a significant ratings downgrade or a systemic disruption to market liquidity) to assess the impact on funding. •  Compliance risk management: Many firms are working to enhance their overall corporate compliance management processes, and the supervisors expect that firms will employ strong risk management practices with appropriate levels of testing. In response to the more exacting requirements of the Bank Secrecy and Patriot Acts and anti-money laundering controls, leading firms have now moved beyond manual systems with very limited capacity to look at patterns of transactions over time and across businesses and countries, and have put in place automated systems for monitoring transactions with more sophisticated filters for identifying suspicious patterns of behavior. The quality of internal compliance controls in the leading firms has advanced in other areas as well, with higher level oversight of an independent compliance function with more rigorous policies to address conflicts of interest involving hedge funds and proprietary trading and the flow of confidential information across the firm.