information electronically rather than mailing paper copies to a reserve bank. through these efforts, the federal reserve aims to strike an appropriate balance between off - site and on - site supervisory activities to ensure that community banks are subject to supervision that is both high - quality and resource - efficient. fourth, our supervisory oversight of community banks is itself grounded in the traditional relationship banking model of funding local lending with customer deposits. there are risks in this model, of course, since geographic and portfolio concentration can make community banks vulnerable to local economic downturns, as we have witnessed during and after the great recession. even though the number of banks on the federal deposit insurance corporation ’ s “ problem list ” has fallen from a peak of 888 at the end of the first quarter of 2011 to 291 at the end of 2014, this number is still nearly three times the historical average. but these risks are understood by supervisors and bankers. traditional regulatory and supervisory methods are well suited to deal with them. indeed, it is noteworthy that most community banks adhering to this model continued to thrive even during the worst years of the financial crisis. 3 see, e. g., r. alton gilbert, andrew p. meyer, and james w. fuchs ( 2013 ), “ the future of community banks : lessons from banks that thrived during the recent financial crisis ( pdf ), ” federal reserve bank of st. louis review, vol. 95 ( march / april ), pp. 115 – 143 ; and dean f. amel and robin a. prager ( 2014 ), “ community bank performance : how important are managers? ( pdf ) ” finance and economics discussion series 2014 – 26 ( washington : board of governors of the federal reserve system, march 18 ). for a study finding relationship lending benefits in an international context, see franco fiordelisi, stefano monferra, and bis central bankers ’ speeches in contrast, community banks that moved beyond their traditional business model and entered unfamiliar or more complex lines or markets experienced difficulties. for example, small banks that turned to a more transactional model and funded construction loans, often outside of their local markets, with borrowings rather than core deposits were more likely to fail. this experience helps explain why our supervisory intensity will often increase for banks, including community banks, that embark upon unfamiliar activities. a similar pattern obtains in the federal reserve ’ s supervision of consumer compliance in community banks. it is axiomatic that all financial consumers deserve the same protection

lessons ; i will pick three : • first, the inadequate assessment of counterparty risk, a task fundamental to lending and investment decisions, was in many ways at the core of the problem. key market participants were allowed to grow through greater leverage and alter market terms in crucial ways, largely unchecked by traditional disciplines. commercial banks, for whom judging credit risk is their life blood, were as guilty as any other institutions. traditional practices of creditors of covering their exposures by requiring collateral that was marked - to - market proved insufficient as market values fell, creating a circular and expanding effect. • second, market participants shared an insufficient recognition of the role of market liquidity in risk management. an important point here is the link between credit and market risk, and the fact that market prices can change sharply when key market participants pull out. in the proverbial “ race for the door, ” nearly everyone gets trampled. • the last point i will note relates to the over - reliance by practitioners on quantitative tools. sophisticated measurement techniques can help greatly in providing insights about the dimensions of risk and sources of possible problems. but, like chains, models are only as strong as their weakest links. every model has assumptions that must be tested, and its limitations must be understood. during periods of market stress nearly “ all bets are off ”. business practices change, otherwise stable and expected correlations in market rates and prices disappear, and sometimes panic ensues. well thought out and designed contingency plans and scenario analysis tailored to specific strategies and portfolios are necessary to prepare for these events and to evaluate an institution ’ s risks. that point was brought home last year. measuring market and credit risk in banks fortunately, progress is being made as banking organizations - typically the largest us and foreign institutions - find better ways to quantify their risks. with market risk - the “ easy ” one - the federal reserve and other regulators built on industry practices for measuring a bank ’ s “ value at risk ” when implementing a new regulatory capital standard for the banking system last year. basing capital requirements on a bank ’ s internal calculations of its largest expected daily trading loss at a 99 % confidence level was an important step, we thought. it produced a standard far more sensitive to changing levels of risk than was the earlier approach. it provided a reasonably consistent standard among banks and also was compatible with current management practice of the world ’ s more progressive banks. last year ’ s events have not changed our view