for instance, we have emphasized to banks the importance of stress testing to help detect risks not identified by more - typical statistical models, such as abnormally large market moves, evaporation of liquidity, prolonged periods of market distress, or structural changes in markets. as i noted in a speech last month, financial innovation can benefit consumers, the financial system, and the broader economy, but it also has risks that must be properly understood. 6 indeed, as you know, financial innovations in areas such as structured credit products and mortgage lending in some degree helped precipitate the current crisis. accordingly, we are requiring banks to evaluate more comprehensively the possible unintended consequences of proposed new financial instruments as well as how those instruments are likely to perform under stressed market conditions. counterparty credit risk is another area in which the federal reserve has been working for some time, and, as the crisis has unfolded, we have intensified our monitoring of how firms manage this type of risk. institutions are being pushed to further improve their understanding ben s. bernanke ( 2009 ), " financial innovation and consumer protection, " speech delivered at the federal reserve system's sixth biennial community affairs research conference, washington, april 17. of key linkages and exposures across the financial system. they are also being asked to analyze how their own defensive actions during periods of stress might put pressure on key counterparties, especially when other market participants are likely to be taking similar measures. a critical component of risk management is understanding the links between incentives and risk - taking, such as in the design and implementation of compensation practices. bonuses and other compensation should provide incentives for employees at all levels to behave in ways that promote the long - run health of the institution. the federal reserve has been working in international forums on compensation and incentives issues ; one product of those efforts was the publication last month by the financial stability board of new principles for sound compensation practices. 7 certainly, an important lesson of the crisis is that the structure of compensation and its effect on incentives for risk - taking is a safety - andsoundness issue. in this and other areas, one of the key lessons for bankers has been the need for timely and effective internal communication about risks. we are putting a high priority on ensuring that management and board of directors are well informed about the various risks that confront the organization and that they are actively engaged in the management of those risks. as we have worked with financial institutions to strengthen their governance and risk management,

/ advocacy / how - did - financial - crisis - affect - small - business - lending - united - states. - 2community banks face. i want to be careful not to overstate those challenges - - to paraphrase mark twain, the reports of your demise are greatly exaggerated - - and i believe that the community bank model has many advantages and will continue to play an integral role in our financial system. these sorts of dynamics are one reason that community banks are an important topic for research. as you probably know, this is the sixth annual community banking conference cosponsored by the federal reserve and the conference of state bank supervisors ( csbs ), and it is the first conference for which the federal deposit insurance corporation is joining as a cosponsor. the organizers of the inaugural conference decided that, rather than holding a traditional academic - style conference, they would invite bankers and bank supervisors to hear what the researchers had to say and to share their real - world experience with the researchers. the hope was that these interactions would prove beneficial to all three groups. the positive feedback that we have received from conference attendees over the past five years strongly supports the wisdom of the organizers ’ decision. over time, the conference has evolved, with some new features introduced each year. the case study competition, which is sponsored by the csbs, introduces undergraduates to community banking and some of the challenges that community bankers face. the emerging scholars program was also added to the conference a few years ago. this program is intended to support ph. d. students who are considering or working on a dissertation on a banking - related topic and encourage them to develop a research agenda that focuses on community banking issues. i would like to congratulate - 3this year ’ s winning case study team, eastern kentucky university, and emerging scholars, jiayi xu, cao fang, and flora ma. not all community banks are the same turning to the topic of today ’ s speech, it occurs to me that we often speak of community banks as though they are all pretty much the same. but, in reality, there is considerable heterogeneity within the group of firms that are commonly considered to be community banks. 3 one important dimension of diversity is size, which can range anywhere from less than $ 100 million in assets to around $ 10 billion in assets. as noted by chairman powell when he spoke at this conference two years ago, looking at community banks as a monolithic group masks some