and constraints include shareholders and market analysts, regulators, prosecutors, elected officials, the media, and the public. market conditions and the actions of competitors can also be significant. nature of risk management financial risk - taking is arguably the fundamental activity of financial intermediaries. 1 unlike most non - financial firms, a financial institution more or less continually makes risk decisions, whose implications can vary significantly based on the nature of the asset involved, market conditions, counterparty identity, and many other factors. the processes by which risk appetites are set and activity managed so as to conform to these risk appetite decisions are central to determining outcomes, and thus the firm ’ s near - term profitability and longer - term stability. for these reasons, there is considerable regulatory interest in these processes, an interest that has been formalized in the federal reserve ’ s annual comprehensive capital analysis and review ( ccar ) and informs the emphasis of our supervision throughout the year. each year, in conjunction with our supervisory stress tests, we provide an assessment to every participating firm of their risk - management and capital planning processes, indicating where specific improvements are needed. the interactions between supervisors and firms on these matters are extensive, focused, and consequential. for this reason, i think we have gained considerable insight into, if not precisely the “ culture ” of the firms, then at least the attitudes of senior and mid - level management toward these risk functions. in some firms the attitude we perceive is one of a mere compliance exercise. the firm proceeds to address the deficiencies identified by the fed in a discrete, almost check - thebox fashion. to oversimplify a bit, i would say that our sense is that management at these firms wants the hurdle to capital distribution removed, but once the specific problems have been remedied, they want to move on. if this is the attitude we perceive, i suspect the working level employees of such firms do the same. the supervisory reaction in such cases is quite likely to be an inclination toward greater scrutiny. intermediaries without sizeable balance sheets of their own, such as mutual funds, may not themselves be assuming risk, but they are creating it for their investors. bis central bankers ’ speeches other firms, by contrast, seem to have internalized the aims of the risk - management processes and systems that we expect of them. in these firms the dialogue can be quite different, with supervisors observing that, even as a specific problem is addressed, such as deficiencies in est

risks in proposed transactions or products. in order to be effective signals, though, the fact of these rewards, and the standards under which they were granted, need to be transparent. punishment systems provide the complement of negative incentives to the positive incentives created by compensation and promotion practices ( even where qualified by clawback or similar provisions ). here the role of the government differs. with respect to positive incentives, regulators affect individuals only by way of requirements or expectations for firms. when it comes to disincentivizing egregious bad behavior, however, the government can play a more direct role. because of the required standard of proof and other constitutional protections, criminal prosecutions of individuals are harder to bring successfully institute of international finance ( 2009 ), compensation in financial services : industry progress and the agenda for change ( washington : iif, march ). see board of governors of the federal reserve system, office of the comptroller of the currency, office of thrift supervision, and federal deposit insurance corporation ( 2010 ), “ federal reserve, occ, ots, fdic issue final guidance on incentive compensation, ” press release, june 21. bis central bankers ’ speeches than criminal prosecutions of firms. but, as i think was learned decades ago when individuals were criminally prosecuted and imprisoned for antitrust law violations, it is difficult to imagine a more effective deterrent to such conduct. banking regulators do not have criminal enforcement powers, of course. but we can, and do, require dismissal of employees as part of our enforcement actions against firms. and we do have the authorities to remove malefactors from their positions in any institution that we regulate and to prohibit them from working in the banking industry. somewhat like criminal prosecutions, these are not easy cases to make. but it is important that we be willing to expend the resources to initiate such actions in appropriate cases. for quite some time, large banking organizations usually dismissed employees who had engaged in significant misconduct or exercised very bad judgment in a quiet, almost surreptitious way. this was particularly true of someone in a responsible position, who would be ushered out the door discreetly, with no recognition internally or externally of the fact of dismissal, or the reasons behind it. frequently, this person would turn up at another financial firm not long thereafter. the dismissing firm ’ s reasoning was that any public awareness of the dismissal could hurt the reputation of the firm and perhaps cause customers or counterparties to rethink