This entails ensuring the appropriate level of expertise about the new businesses; assessing that all relevant risks are identified, monitored, measured, and managed for each business line and the firm as a whole; and establishing the appropriate interaction with the enterprise risk management functions and Boards of Directors. These are core parts of supervisory expectations for traditional risk management and banks need to ensure that they are applied appropriately as they evolve. Moreover, expansion into new activities can bring entirely new risks beyond the direct risks of each specific business. For example, a firm that expands by offering a broader set of products to its existing base of customers. This has the potential to introduce greater correlation of business line results and a different type of shock if a financial firm potentially loses multiple revenue streams should a single customer face distress. Alternatively, a firm might be inclined to use one business line to cross-subsidize another, which makes measuring and managing risks and allocating capital more difficult from a business line perspective. In both cases, the potential risks would need to be managed at the enterprise level to reflect these cross-business linkages. A second implication is the need for the supervisory community to be responsive to the evolution of firms’ strategies and business models. As firms evolve and pursue new strategies, supervisors need to understand those changes and assess firms accordingly. We must constantly evaluate the strategic focus of the firms we supervise and assess whether our approach and perspective are appropriate for the new activities.

Research suggests that in a world with multiple capital constraints, e.g., a leverage ratio and a risk-based capital, banks face incentives to do the same thing rather than 7 2/5  BIS central bankers' speeches  specializing in areas where they each have a natural competitive advantage.7 This type of academic work provides a conceptual framework for understanding how optimizing behavior against multiple constraints might lead banks to pursue similar strategies and become more homogenous over time. Interest Rates A second dominant theme over the post-crisis period has been unconventional monetary policy, both in the U.S. and around the world, which has direct implications for the profitability and returns of U.S. commercial banks. The low rate environment experienced through 2015, for example, constrained bank earnings, particularly net interest income earned through traditional banking activities over this period. More recently, current and expected future returns on equity for large banks have improved, in part reflecting higher interest rates and net interest margins, as well as other factors such as lower tax rates and expectations for a stronger economy. Despite recent improvements, earnings pressures over most of the post-crisis period have pushed banks to reassess business strategies. For example, some banks attempted to enhance returns by building capacity and reach in new businesses; some looked to benefit from scale and scope activities by leveraging existing infrastructure, technology, and processes to offer a broader set of services at lower cost; some looked to reduce risk through greater diversification, and others pulled back from activities outside of their core focus.