As banks focus on where to cut and think about what adds value for their business, I urge bank management to recognize that strong risk management, including strong internal controls and comprehensive and coordinated management information systems, should not fall victim to the search for savings. In the last few months, we have seen some institutions considering cuts that could strike close to the muscle and bone of sound business practice. In addition, we've seen that other institutions are reluctant to make additional investments in risk management in line with the growth of their activities. I know these ill-advised cuts are being considered at only a few institutions, and at the present time I certainly do not believe they currently post a systemic risk to the national banking system. However, I am concerned that what is happening at a few institutions could become a trend, and that a careless wielding of budget axes could threaten the ability of banks to guard against breaches of fundamental controls.
Internal controls are one of a bank's most important lines of defense in controlling risk.
I'm not telling the industry much it doesn't know. Today, generally speaking, most American banks do indeed have superior internal controls. These lessons serve as reminders that banks should effectively segregate responsibility for making investment and credit decisions from responsibility for disbursing and receiving funds. And, of course, the domestic landscape has not always been unscathed either. We should not forget the go-go days of energy lending or real estate lending and what happened in their wake.