The various forms of misconduct impose direct costs such as fines, legal fees in investigating allegations and defending lawsuits, and internal monitoring costs that should matter to firms. In this view, a principal benefit to a financial firm of having a strong culture that builds trustworthiness is the avoidance of the bad behavior that can carry significant monetary costs and can inflict destructive damage to the organization’s reputation. Firms should have every incentive to manage and internalize those potential costs. More broadly, there may be additional adverse effects on other firms or the financial sector as a whole if there is a widespread lack of trust in financial services. Similarly, my colleague Michael Strine has argued that the financial industry exists, in part, to enhance the public good and thus faces a higher degree of social responsibility due to its role in supporting the broader economy.4 Both of these effects suggest a role for the public sector in facilitating appropriate behavior and conduct in the financial services industry. Supervision can contribute to this through support for the development of effective internal governance regimes, prudent risk management policies, and strong compliance and control structures, all within a framework of effective oversight from the Board of Directors. Conclusion To conclude, I’ve spoken today about the conceptual rationale for public sector intervention through supervision and some practical issues related to how we execute on our supervisory responsibilities at the Federal Reserve Bank of New York.

Internally, the Federal Reserve has organized a supervisory program on cybersecurity that consists of subject matter experts from across the Federal Reserve System. Work is underway to enhance the analysis of IT examination data in conjunction with threat information to enhance risk-focused reviews during examinations. Through our discovery work with financial institutions, we have found that the state of cybersecurity readiness varies across firms. Supervisors are seeking to develop common principles to address cybersecurity issues and will work with other agencies to ensure that firms are dedicating resources and taking the appropriate actions to defend the operations that are critical to the financial services sector against cyber threats. This is particularly true for those risks that could be channeled through interconnected organizations and that could potentially have an impact on other firms and more broadly across the sector. •  Fintech The financial sector, like the broader U.S. economy and society, is becoming increasingly digital and there is considerable discussion of “fintech” – defined simply as the intersection between financial services and new technologies. A recent industry study, for example, reports that investment in fintech companies grew from $ billion in 2010 to $ billion in 2015.3 It is unclear, however, whether fintech will enhance or fundamentally disrupt the financial service and payments industries, or perhaps it is some combination of both. In any of these cases, however, supervisors will have a keen interest in monitoring the impact on the business models and risks of financial institutions and the way financial intermediation is done.