In addition to stress testing significant individual credits, bank management should consider weighing key portfolio segments against hypothetical scenarios to identify flash points that could push risk beyond acceptable levels. It may be valuable to assess how the portfolio would respond to events such as rapid interest rate change, technological changes, commodity or other price shocks, and a downturn in the business cycle. A good method is to determine best, worst and most likely scenarios for each segment of your portfolio, and to have contingency plans in place that would increase monitoring, limit portfolio growth, and provide hedging or exit strategies if circumstances warrant. In short, this advisory letter will help focus the industry's attention on the importance of comprehensive risk management processes. Financial Modernization Finally, let me turn to financial modernization.
Financial modernization is first and foremost a safety and soundness issue.
In our dynamic economy, if banks are not able to offer new products, to evolve as the markets evolve, they will not survive as healthy entities. Accordingly, I am pleased to see that the Congress has recognized the importance of this issue and has given financial modernization priority on its agenda for this session. I am similarly pleased that the Federal Reserve has taken action in this area. The OCC, too, will continue, as we have for the last several years, to allow the system to evolve. It is not enough for a statute or regulation to allow banks to evolve if the law or regulation permits evolution only in such an inefficient way that banks cannot actually compete with other entities.