can rise and that negative amortization can increase the amount owed on the property above what was originally borrowed. these products warrant strong risk - management standards as well as appropriate capital and loan - loss reserves. compliance - risk management another area the financial sector and the regulatory community are focused on today is compliancerisk management. “ compliance risk ” can be defined as the risk of legal or regulatory sanctions, financial loss, or damage to an organization ’ s reputation and franchise value ; this type of risk may result when an organization fails to comply with the laws, regulations, or standards or codes of conduct that are applicable to its business activities and functions. the federal reserve expects banking organizations to have in place an infrastructure that is able to identify and control the compliance risks facing their organization. fortunately, many banking organizations in the united states substantially affected by these risks are ahead of the curve and have invested in enterprisewide corporate compliance. to create appropriate compliance - risk controls, organizations must first understand risks across the entire entity. managers should be expected to evaluate the risks and controls within their scope of authority at least annually. i also emphasize the need for the board of directors and senior management to ensure that staff members throughout an organization understand the compliance objectives and the role they have in implementing the compliance program. clear lines of communication and authority help to avoid conflicts of interest. an enterprise - wide compliance - risk management program should be dynamic and proactive, meaning it constantly assesses evolving risks when new business lines or activities are added or when existing activities are altered. to avoid having a program that operates on “ autopilot, ” an organization must continuously reassess its risks and controls and communicate with its business lines. an integrated approach to compliance - risk management can be particularly effective for bank secrecy act and anti - money - laundering ( bsa / aml ) compliance. often, the identification of a bsa / aml risk or deficiency in one area of business can indicate potential problems or concerns in other activities across the organization. controlling bsa / aml risk continues to be a primary concern for banking organizations. we recognize the investment and commitment that organizations have made toward compliance with bsa / aml requirements, and, in return, we continue to work to ensure that obligations in this area are clearly understood and communicated to banking organizations and examiners alike. the federal financial institutions examination council ( ffiec ) bsa / aml examination manual issued last year is one example of our interagency efforts. we also

##licability may also vary with changes in the market. the bottom line for today ’ s banking institutions, particularly the largest and most complex ones, is that they must continue to monitor very carefully the embedded risks of their products and services, pay close attention to subtle changes in business practices that could affect the risks related to a given product, and fully understand how the risks in all their business lines intersect and combine to affect the risk profile of the consolidated entity. current perspective on risk - management challenges commercial real estate now that i have described in fairly broad terms the types of risk - management challenges institutions may encounter, i think it would be helpful to provide some concrete examples. as you are likely aware, the u. s. banking agencies recently issued for public comment supervisory guidance on commercial real estate ( cre ), which focused particularly on cre concentrations. regardless of its size, we believe an institution involved in cre lending would benefit from a review of the guidance. as you know, cre played a central role in the banking problems of the late 1980s and early 1990s and has historically been a highly volatile asset class. over the past dozen years, cre concentrations have been rising and are now at record levels at many banking organizations. for certain groups of banks - such as those between $ 1 billion and $ 10 billion - - average cre concentrations, which can include owner - occupied cre, are today above 300 percent. this compares to a previous peak of cre concentrations of 200 percent seen in the late 1980s and early 1990s. the agencies ’ cre concentration guidance, which excludes owner - occupied cre, is intended to reinforce existing risk - management guidelines on cre, and it offers institutions some suggestions for improving their risk - management practices. the agencies share a concern that some institutions ’ riskmanagement practices are not keeping up with the growth in their cre exposures. the guidance describes the key risk - management elements for an institution ’ s cre lending, because banks, in order to attract new business and sustain loan volume, may be inclined to occasionally make some compromises and concessions to borrowers. as supervisors, we want to ensure that loan - to - value standards and debt - service - coverage ratios are meeting the organization ’ s policies - - and that there is not an increasing number of exceptions to those standards and ratios. we also continue to monitor whether lenders routinely adjust covenants, lengthen maturities, or reduce collateral requirements. additionally, the guidance re