that would permit supervisors to extend the time between on - site examinations to eighteen months for well - managed and well - capitalized banks with up to $ 500 million in assets. this change would double the current size threshold and has the potential to allow roughly 1, 200 more community institutions to qualify for the extended examination cycle. in my remaining time, i would like to discuss some of the key financial and risk - management challenges that we have identified through our supervisory activities. banking has always been a business of taking and managing risks, but evolving market and economic conditions affect the types of opportunities available. in recent years, community banks have become more focused on commercial real estate lending, leading to a significant shift in the balance sheet and risk profiles of growing numbers of banks. in most local markets, commercial real estate loans have performed well. our examiners tell us that lending standards are generally sound and are not comparable to the standards that contributed to broad problems in the banking industry two decades ago. in particular, real estate appraisal practices have improved. however, more recently, there have been signs of some easing of underwriting standards. the rapid growth in commercial real estate exposures relative to capital and assets raises the possibility that risk - management practices in community banks may not have kept pace with growing concentrations and may be due for upgrades in oversight, policies, information systems, and stress testing. in response to these developments, the federal banking agencies have recently proposed guidance that would focus examiners'attention on those loans that are particularly vulnerable to adverse market conditions - - that is, loans dependent primarily on the sale, lease, or refinancing of commercial property as the source of repayment. i emphasize that, in proposing this guidance, supervisors are not aiming to discourage banks from making sound loans in commercial real estate or in any other loan category. rather, we are affirming the need for each bank to recognize the risks arising from concentration and to have in place appropriate risk - management practices and capital levels. adjusting to changes in the level of short - term interest rates can also pose challenges to community banks. thus far, the relative stability of community bank net interest margins suggests that they have done a good job of managing their interest rate risk exposure throughout the recent increase in market rates. importantly, most community banks have effectively controlled the maturity distributions of their assets and made significant improvements over the past decade to their management and measurement of interest rate risk. certainly, the procedures employed by community banks today are significantly more

##chase agreement ( repo ) funding of asset - backed securities were also troublesome for both banks and nonbanks. see gary gorton and andrew metrick ( 2012 ), “ securitized banking and the run on repo, ” journal of financial economics, vol. 104 ( june ), pp. 425 – 51. moreover, state and municipal borrowers had been issuing long - term debt while paying short - term interest rates by using structures such as variable - rate demand notes ( vrdns ), which gave holders the right to put the securities back to liquidity providers on short notice. when the money market fund investors that held vrdns became worried about their ability to get their money out at short notice, the volume of putbacks rose, and these developments ultimately led to increased payment obligations for some municipalities. bis central bankers ’ speeches distress of nonbanks and its influence on the financial system. before the crisis, the authorities had few policy levers to provide liquidity or to resolve failures of nonbanks in a way that would avoid serious spillovers. liquidity was ultimately provided to some nonbank markets, such as the markets for securities backed by consumer and business assets, but the facilities were far from simple and took substantial time to create and implement. 6 finally, nonbank distress can transmit to the banking sector through many channels, such as counterparty relationships, disruptions in funding markets, and knock - on effects of asset fire sales. the failure of lehman provides a good example. it was a nonbank, and its failure both imposed direct losses on its many types of counterparties and disrupted many markets with negative effects on banks. principles for prudential regulation of nonbank intermediaries and activities it is widely understood that any regulation of nonbanks should fit their activities and the vulnerabilities they pose, which implies that not every nonbank financial institution or activity necessarily needs to be regulated. the two key principles for prudential regulation of nonbanks when it is warranted, are simple : first, we should be attentive to solvency and liquidity ; second, we should recognize that the financial system will change over time, and thus close monitoring and analysis of the system are essential. insolvency and illiquidity are classic financial stability concerns. and as mentioned, they were common themes of the distress at nonbanks that we observed during the crisis. thus, we will not go far wrong if we