We have designed a stable framework that we believe will stand the test of time. But we have always been clear that some of the details may need to change over time to ensure that they remain relevant to the ongoing evolution in banking markets and risk management practices. Indeed, in the text of the Basel II framework that was published in June 2004, the Committee reiterated its intention to maintain an active dialogue with the industry to ensure that the new framework keeps pace with, and can be applied to, ongoing developments in the financial services sector. The framework itself already provides banks with a great degree of latitude in developing new measures of exposures to risk and new means for addressing them. But supervisors – and banks – are still responsible for evaluating whether the framework addresses risk exposures in a sensible manner and in line with our sense of sound and best practices that are being developed. Status of work on the trading book There are two areas where both banks and supervisors recognised that this work could already commence. One was to find a prudentially sound treatment under Basel II for exposures to “double default,” where the risk of both a borrower and a guarantor defaulting on the same obligation may be substantially lower than the risk of only one of the parties defaulting. The other area concerns the applying Basel II to certain exposures arising from trading activities. This brings me on to my second topic.

They may develop aberrant norms that can undermine standard oversight and controls. Compliance can and should leverage its independence to spot silos—or any form of “groupthink”—before undue risks mature. Third, compliance can increase its influence through careful stewardship of its people. This means attracting and retaining talented compliance professionals, and, whenever possible, insisting on getting to know the business area. The role of a compliance officer should include building relationships and becoming a trusted resource. Such relationships can yield a deeper understanding of, among other things, the motivations and pressures that are affecting the business. These insights can inform and help improve policies, procedures, testing and monitoring. As I mentioned earlier, compliance can become more effective if it calibrates processes to actual circumstances and behaviors. Finding and retaining talented people for compliance roles is a major challenge facing firms across the industry right now. After all, compliance can be a nearly impossible job. And welltrained, experienced compliance personnel are scarce. Those are but two of the many challenges that compliance functions in financial institutions face. I certainly do not have solutions to every compliance challenge. But, having to manage the attraction, retention, and development of the New York Fed’s compliance staff, I am sympathetic. I am optimistic, too. As I mentioned earlier, I think the broad trends in compliance are heading in the right direction. Compliance functions are gaining influence. Greater clarity about roles can help. Compliance will always be a difficult job, but does not have to be a seemingly impossible one.