susan s bies : bank performance and corporate governance speech by ms susan s bies, member of the board of governors of the us federal reserve system, before the pennsylvania association of community bankers, memphis, tennessee, 28 september 2002. * * * good morning. thank you for the invitation to speak to members of the pennsylvania association of community bankers and to return to my home of twenty - four years, memphis, tennessee. some of you have asked if i have had any surprises in my new role as a governor of the federal reserve board. i must say that the biggest surprise is the amount of required reading. i haven ’ t read so much on so many different topics since i was in graduate school! not only do i get to discuss economics and monetary policy, but also - - as chair of the board ’ s bank supervision committee - - i am deeply involved in bank regulation and operations issues. even though i brought with me twenty - seven years of banking experience, including an earlier stint with the federal reserve, i find that my current responsibilities make me consider issues in new ways. consequently, i look forward to meeting with groups like yours so that i have a better understanding of emerging issues from diverse perspectives. in my comments today, i will first address the recent financial performance of u. s. banks, and of community banks in particular. i will then turn to improvements that banks large and small are making in measuring and managing risk, the responsibilities of directors and senior managers in corporate governance, and finally, to the importance of sound accounting practices. in my view, these topics are inextricably linked and in light of continuing questions of confidence in america ’ s corporations, they are quite timely. financial condition of u. s. banks last year was exceptional in many respects, with the united states slipping into a recession, the september terrorist attacks, the stock market declines, and all of the related events. in response, the federal reserve reduced interest rates at every meeting of the federal open market committee in 2001 and an additional three times between meetings, for a total of eleven rate cuts accumulating to 475 basis points. since then, the federal reserve has shifted its bias from one in which we were concerned more with weakness, to one in which the risks of inflation and weakness were balanced, then back again - - most recently - - to a concern about economic growth. the direct effects of the past year ’ s stressful events were painful enough. in addition, abusive accounting and corporate

want to highlight relates to securitization, which i mentioned earlier as one way in which parts of the financial system can become interconnected. an important rule, finalized late last year, will require the securitizers of some assets to retain at least 5 percent of the credit risk of the assets that collateralize the securities. 8 with “ skin in the game, ” the incentive to cut corners in extending loans is reduced, and the entire chain created when assets are securitized should be stronger. transparency has also been enhanced with stronger disclosure requirements for securitizations. at this stage of the recovery, there are signs of reduced nonbank financial sector vulnerabilities. leverage is quite low in parts of the sector and appears moderate overall. leverage at hedge funds, while difficult to measure, is an exception and appears in aggregate to have trended upward in recent years. market - level information on short - term wholesale funding – such as commercial paper and repurchase agreements – indicate subdued activity after its level fell dramatically during the crisis. while issuance of securitizations has been picking up, its levels remains moderate. the available data paint a picture of a nonbank sector that has generally reduced its vulnerability to the types of shocks that we saw during the crisis. however, the nonbank sector is evolving in response to new regulations, changes in investor preferences, and a multitude of other factors that are always influencing the financial system. for example, open - end mutual funds now hold a greater share of debt, and more derivatives are being the four nonbank institutions that have been designated by the fsoc are metlife, inc. ; american international group, inc. ; general electric capital corporation, inc. ; and prudential financial, inc. for more information and to access the fsoc annual report, see the fsoc ’ s webpage on the u. s. treasury ’ s website. in october 2014, six federal agencies – the board of governors of the federal reserve system, the department of housing and urban development, the federal deposit insurance corporation, the federal housing finance agency, the office of the comptroller of the currency, and the securities and exchange commission – approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions. the final rule generally requires sponsors of asset - backed securities ( abs ) to retain not less than five percent of the credit risk of the assets collateralizing the abs issuance