not really a strategy at all. market infrastructure, which affects not only the ways in which firms are connected to each other but also the types of shocks to confidence that they may encounter, is an important external factor that should be taken into account in strategic risk management. as a concluding point, i will offer a few comments on one additional area to which banking institutions must pay particular attention : the regulatory and supervisory structure in which banks operate. banking is an industry that is subject both to market competition and considerable regulation. therefore, banking institutions must not only evaluate potential changes in the competitive financial landscape ( as i noted earlier ), but must also pay attention to potential changes on the regulatory side. over the past year, there have been a number of suggestions for possible statutory changes in u. s. financial services regulation, so bank directors must be prepared for whichever outcomes such changes might imply for the regulatory structure in the united states. for example, the congress may wish to undertake legislative action to effect regulatory changes, or there may be changes to the existing authority and responsibility of certain regulatory bodies. in any event, there will likely be some type of adjustments in regulatory structure simply given the changes in the financial services landscape. given the fluid situation in which we find ourselves today, bank directors and senior management in their strategic planning have to anticipate a range of potential outcomes in the regulatory sphere in both the short and long term. since banking and financial markets are so interconnected, the fundamental transformation in financial services is affecting all types of financial institutions, even those less directly affected by recent events. importantly, in developing strategic risk management frameworks, institutions must not only understand the direct consequences to their own firms of such shifts, but must also recognize that consequences to other firms can have effects on the broader market. the heightened importance of funding and liquidity is a clear example of a major change that has far - reaching ramifications and, thus, has to be appropriately addressed in assembling any credible strategic risk management framework in an interconnected world.

analysis. ensuring that risk management permeates an entire organization may require some fundamental changes for certain firms. and this lesson applies not just to the prominent organizations mentioned in the headlines of late, but also to smaller firms. even if smaller firms have been less affected by the recent turmoil ( and perhaps have even won back some market share as customers seek more " traditional " places to put their money ), their managements must understand that the financial landscape has changed and needs to be surveyed anew because events outside of their control in market - wide flight to liquidity, for example, can have direct impacts on them. of vital importance will be incorporating into strategic risk management the lesson that funding and liquidity will be a major determinant of institutions'success going forward. building a rigorous strategic risk management framework requires an institution to reexamine both its internal practices and its external environment, and to understand how closely the two are connected. in other words, external factors have an impact on internal practices, but those internal practices, because financial markets are so interconnected, can in turn have an impact on how the institution is viewed externally – and even have an impact on the marketplace more broadly. we have witnessed several such examples of late, in which an institution encountered severe liquidity needs, which then affected funding for other institutions. institutions need to understand better that a number of factors affecting their business are beyond their control, and that events can have secondary or tertiary " knock - on " effects. the real art is to realize that while all institutions may be affected by external factors, each is affected in its own way. now that i have laid out a general framework for strategic risk management, i would like to offer a few examples of its application. funding and liquidity as i noted, the clear driver of the fundamental transformation in financial services is the increased importance of funding and liquidity. the ability to secure funding is a fundamental task in banking, and banks have been managing expected liquidity demands since the beginning of banking itself. in times of stress, such as now, having a solid and reliable funding structure becomes much more important, in some cases so much so that it affects most other banking activities. the current turmoil has brought about substantial deleveraging in financial services. managing this process is an immediate challenge for banking institutions, as they must consider the need to reduce leverage at their own institution as well as understand the consequences of deleveraging at other firms. this is clearly an example of external factors