are identifying weaknesses in banks'risk management practices, including underwriting practices, appraisal processes, stress testing, and market analysis. based on these results, we are updating our supervisory plans and examination schedules to focus our resources most effectively on those institutions presenting the greatest risk and needing the most improvement. finally, we just concluded a federal reserve examiner training effort on cre topics, including appraisal practices, loan loss allowances, stress testing, and board and management oversight. the training focused on the importance of ensuring prudent risk management practices, without unduly curtailing credit availability. counterparty credit risk concerns in financial markets about the creditworthiness of some financial intermediaries have eased somewhat since the first half of march, but those concerns remain relatively high. more fundamentally, the proper management of counterparty credit risk – which is the risk of loss from a counterparty's failure to perform its financial obligations – is a prerequisite for protecting the entire system from contagion when any one institution fails. consistent with the recommendations of recent reports, we are looking at how firms are addressing weaknesses in counterparty credit risk management practices highlighted by recent events, including the measurement and aggregation of exposures stemming from a wide range of transactions with both unregulated and regulated entities. for instance, we are emphasizing that firms should use a variety of techniques to measure potential exposure on over - the - counter ( otc ) derivatives, repurchase agreements, and other contracts, and that they should aggregate all exposures to each counterparty. in this context, we have been closely monitoring counterparty exposures arising from transactions with monoline financial guarantors and have been discussing with banks the measurement and management of these positions. in addition, we are working to strengthen the market infrastructure for financial transactions to make it more robust and more resilient. in particular, the federal reserve bank of new york continues to work with domestic and international prudential supervisors of otc derivatives dealers to strengthen the infrastructure for those large and rapidly growing markets. the supervisors are emphasizing to the major dealers and to other active market participants the importance of setting standards for the accuracy and timeliness of trade data submission and for the timeliness of resolutions of errors in trade matching for otc derivatives contracts. furthermore, consistent with the recommendations made in recent reports on turbulence in financial markets, supervisors are encouraging the development by the industry of a longer - term plan for an integrated operational infrastructure supporting otc derivatives

those areas that precipitated recent events, but more broadly. in light of recent events, we have redoubled our efforts to ensure that senior management properly defines overall risk preferences and creates incentives for employees to abide by those preferences, such as effective firm - wide limits and controls. we are reminding banks of the importance of information - sharing throughout the entire organization and of the dangers of information silos. in addition, we are strongly encouraging institutions to improve and / or build out their risk functions, so that independent risk managers are empowered to dig deep for latent risks, including concentrations that often arise only in times of stress. having given some general thoughts on current supervisory issues and supervisory approaches to improving risk management, i would now like to turn to a few specific areas in which we are addressing the challenges facing institutions and helping bring about improvements in their risk management. residential lending risks associated with residential mortgage and home equity lending remain a top supervisory priority due to the continued negative trends in home prices, elevated levels of delinquencies and foreclosures, and slack demand for residential mortgage securities in the secondary markets. banks continue to experience losses on residential first mortgage loans, especially, but not exclusively, on nonprime lending. losses on home equity loans are also increasing significantly, even for lenders not heavily involved in subprime lending, and loss severities as a percentage of outstanding exposure on this product are greater than for first lien loans. and mortgage securities markets whose instruments are not supported by government - sponsored entities continue to be adversely affected by problems in the housing market, complicating banks'risk management in this sector. supervisors are acting on several fronts to address problems related to residential first and second mortgages. first, we are making sure institutions comply with our existing guidance on nontraditional mortgages and on home equity loans, issued in 2006 and 2005, respectively, as well as guidance on subprime lending issued last year. and we are evaluating institutions based on the risk management practices discussed in those guidance documents. we expect institutions to conduct rigorous stress tests of potential future losses related to residential mortgage loans, home equity lines, and mortgage - backed securities. we continue to encourage lenders and mortgage servicers to work constructively with borrowers at risk of default and to consider prudent workout arrangements to avoid unnecessary foreclosures. as you know, the federal reserve believes that prudent workout arrangements that are consistent with safe and sound