the much lower number of problem banks, and the lower level of problem loans, in the recession that began early last year, compared to the previous one. for bank supervisors, the industry ’ s own growing emphasis on enhancing risk management practices has allowed us to shift our approach from evaluating financial results to understanding and assessing the quality of internal processes. by looking at the strength of internal controls and the quality of analysis and judgement that management applies, we are better able to understand how well a bank will weather potential future challenges or business downturns. in this context, one area that has come under increased scrutiny is how firms manage their compliance activities across the organization. firm - wide compliance management is an important element of good corporate governance and one that can reveal much about a bank ’ s culture and commitment to managing not only legal and reputational risk, but credit, market and operational risks as well. this shift in emphasis should be evident in the examination findings that the u. s. bankers in the room are receiving. we do not want our examiners to give you back your own numbers, or to limit their evaluation of your institution to where you stand in terms of some rigid regulatory parameters. such information should hardly be news to you. nor should it be the principal basis on which we assess your institution. rather, our dialogue with you should be focused on our evaluation of the rigor of your control processes, and particularly on our view of your risk management practices and systems relative to evolving industry standards. we have the tremendous advantage of breadth of access to firms engaging in a given business line, allowing us to develop a clear perspective on evolving best practices. at the new york fed, we have looked to maximize this advantage by setting up specialized teams to review specific business lines across the industry in order to develop that informed perspective. a key goal of our new organizational approach is to enable us to share with you our specific insights on best practices across a range of institutions. in the past year or so, i think we have made quite good progress in providing this peer perspective on risk management and controls. in such areas as corporate governance, economic capital estimation, and anti - money laundering, i think we have been able to be quite specific on how well a given banking organization measures up to evolving industry standards - including what needs to be done to move up to the top rung of performance. i also recognize that there is a tremendous demand for us to provide even more guidance in these dimensions. in the numerous feedback sessions

william j mcdonough : risk management, supervision and the new basel accord remarks by mr william j mcdonough, president and chief executive officer of the federal reserve bank of new york, at the bond market association : 2003 legal and compliance conference, new york city, 4 february 2003. * * * thank you, paul, for your kind introduction. it ’ s a pleasure to be here today, especially since the important work that compliance and legal officers carry out in their own institutions complements very well the responsibility financial supervisors have to promote safety and soundness across the entire financial services sector. as legal and compliance professionals, the issue you are really addressing is how, and to what extent, your institution is managing risk. to outsiders, this process can appear, superficially, to be formulaic and rules - based. you and i know, however, that corporate governance depends on more than just a company ’ s compliance with rules. we are all learning that effective corporate governance emerges from the business culture that a company nurtures throughout all of its operations. in recent months, we ’ ve witnessed what happens when firms fail to develop the commitment to manage risks appropriately. avoiding the corporate debacles of the recent past requires a clear and consistent message, as well as a transparent pattern of behavior, that must first emerge from the boardroom. it must then filter down to the executive offices, the front offices, and the back offices. in a similar vein, the work of financial supervision is moving away from a purely retrospective, rulesbased approach. this is particularly true in the banking world. bank supervisors in the united states and many countries around the world are assessing the safety and soundness of banks based less on the strength of the balance sheet today, and more on the strength of controls that will safeguard a bank ’ s financial health tomorrow. still, we believe that evaluating the strength of controls is, in itself, not enough. indeed, the tremendous competitive spirit and ingenuity of the financial services sector drives rapid innovation in the goods and services offered. as those offerings evolve, so, too, must the structures evolve that are intended to control the associated new risks. against this backdrop of constant evolution and inventiveness, the job of bank supervisors is certainly not to hinder the responsible pursuit of new opportunities and profits. rather, it is our job to encourage banks to ensure that their controls evolve with their businesses. the members of the basel committee believe that public policy can best support