reliable estimates of the size and portfolio composition of major counterparties were lacking and that improved credit risk management techniques were needed in two key areas : credit and market exposure measurement, and counterparty due diligence. let me be a bit more specific about some of the weaknesses found in credit risk management techniques. for example, some institutions routinely performed credit assessments using sparse, often unaudited financial information from valued customers, some of which had recorded substantial profits in previous years. moreover, institutions that received intermittent financial statements and had infrequent contacts with these counterparties were left to make periodic credit assessments using stale information in a rapidly changing market. this insufficient information impeded the setting of prudent credit limits and terms, including collateral requirements and contract covenants. many risk managers also failed to account fully for the risks involved in new financial products. non - traditional products, such as equity repos and credit derivatives, challenged existing credit – 2 – analysis systems and methodologies. in addition, relatively few financial institutions attempted to stress test credit exposures and even fewer anticipated a market environment as adverse as what we experienced in the third quarter. for these and most other institutions, the rush to mitigate and reduce their exposures, particularly to highly leveraged institutions such as hedge funds, quickly resulted in the widespread withdrawal of all lending activity to some troubled sectors, regardless of an individual counterparty ’ s financial condition. while these decisions undoubtedly were intended to reduce risk and avert losses, they also served to exacerbate already extraordinary financial market fragility. given that the task of assessing and managing risk is not going to get any easier as we move into the 21st century, let me now turn to some of the issues that i believe will challenge financial institution managers in the coming year and beyond. one issue is the increasing integration of banking, securities and insurance services ; a second is the increasing pace at which capital moves across international borders ; a third, the year 2000 problem ; and a fourth, the challenge of bringing improved risk management techniques to business operations as a whole, including the trading rooms. this is particularly important for participants in the rapidly changing fixedincome markets. first, the integration of previously separate financial services means that institutions must be prepared to manage risks across a far wider range of products, business units, and counterparties than they have been accustomed to doing. in the securities lending markets, for example, an increasing number of firms are accepting equities as collateral for financing

jerome h powell : introductory comments – roundtable on the interim report of the alternative reference rates committee introductory comments by mr jerome h powell, member of the board of governors of the federal reserve system, at the roundtable on the interim report of the alternative reference rates committee, sponsored by the federal reserve board and the federal reserve bank of new york, new york city, 21 june 2016. * * * i want to thank you all for coming today, and i also want to thank the alternative reference rates committee ( arrc ) for all its work in developing its interim report. this report marks a new stage in reference rate reform. 1 reference benchmarks are a key part of the financial infrastructure. about $ 300 trillion dollars in contracts reference libor alone. but benchmarks were not given much consideration prior to the recent scandals involving attempts to manipulate them. since then, the official sector has thought seriously about financial benchmarks, conducting a number of investigations into charges of manipulation, publishing the international organization of securities commission ’ s ( iosco ) principles for financial benchmarks and, through the financial stability board ( fsb ), sponsoring major reform efforts of both interest rate and foreign exchange benchmarks. 2 the institutions represented on the arrc have also had to think seriously about these issues as they have developed this interim report. now, we need end users to begin to think more seriously about how they use benchmarks and the risks they are taking on by relying so heavily on a reference rate – in this case u. s. dollar libor – that is less resilient than it needs to be. in saying this, i want to make it clear that libor has been significantly improved. ice benchmark administration is in the process of making important changes to its methodology, and submissions to libor are now regulated by the united kingdom ’ s financial conduct authority. however, the term money market borrowing by banks that underlies u. s. dollar libor has experienced a secular decline. as a result, the majority of u. s. dollar libor submissions must still rely on expert judgement, and even those submissions that are transaction - based may be based on relatively few actual trades. this calls into question whether libor can ultimately satisfy iosco principle 7 regarding data sufficiency, which requires that a benchmark be based on an active market. that principle is a particularly important one, as it is difficult to ask banks to submit rates at which they believe they could borrow on a daily basis if