provides assurance to stakeholders ( management committee, the president, and the board ) who delegate risk - taking authority to the business lines. from first - line businesses and support functions, risk information flows to the second line, and then to the risk subcommittee of our bank ’ s management committee. the risk subcommittee discusses significant emerging and existing risks, provides perspectives on managing and mitigating risks, and supports management committee review and decision making. the audit and risk subcommittee of the bank ’ s board of directors and the board of directors itself are at the top of the governance chain, although there are limitations on their roles with respect to supervisory and monetary policy issues. 3 operational risk management the bank ’ s operational risk approach sits within, and is shaped by the bank ’ s overall risk framework. roles and responsibilities as well as escalation and reporting follow the general structure i previously described. at this point, though, i can drill down into operational risk specifics. in the first line of defense, operational risk management is conducted by staff in the front line units with support from first - line ’ s centralized risk management resources ( usually as part of a business ’ shared services function ). the first line is responsible and accountable for the identification, analysis, management, and monitoring of the operational risks that arise as a result of its activities. second line operational risk management is led by the central operational risk function in the risk group. central operational risk provides independent assessment and oversight of first - line operational risks and risk management practices and is responsible for maintaining and enhancing the bank ’ s operational risk framework. our third line, internal audit, assesses the design and implementation of the operational risk framework and provides feedback on risk issues as an observer on governance committees. the foundations of the bank ’ s operational risk program are the risk event reporting process and the risk and control self - assessment process. these processes are central to risk identification, analysis, and response. the risk event reporting process involves real - time collection, classification, analysis, and escalation of operational risk events including establishment of root causes and determination of remediation plans. you are all likely familiar with reporting risk events that have impacted your institution and categorizing them as low, moderate or significant. we do this as well. in addition, we require reporting of near miss events, which is when a control failure has occurred but we ’ ve been fortunate that there was no impact to the bank. these near miss events are a window into vulnera

functioning banking system for encouraging, collecting and deploying society ’ s savings in a fair and impartial way into productive investments, there would be little hope for our economy, or any other, to mobilize the real resources necessary for economic growth and stability. with this in mind, one of my major concerns going forward is the quality of bank lending. banks are now at a critical phase in the credit cycle. after years of high quarterly profits, low delinquency rates and comfortable capital ratios, it is easy to forget the fundamentals of sound lending. and, as any good coach will tell you, it ’ s the fundamentals, the basics, that make or break your performance. the most important of the fundamentals is maintaining rigorous credit standards, especially in an environment of increased competition for new and existing customers. experience teaches us that the worst loans are often made in the best of times. and because things are awfully good at the moment, i can ’ t help but remind bankers and supervisors alike that the sun doesn ’ t always shine so brightly. indeed, sometimes it even rains. to paraphrase mark twain, reports of the business cycle ’ s demise are greatly exaggerated. in circumstances this favorable, loan officers must make doubly certain that there is every reason to believe that the loans they make are collectible. this is especially important for younger bankers who, given the length of this expansion, have never experienced a serious recession and may mistakenly view current conditions as ordinary rather than as exceptional. lending granted on that erroneous basis would have grave consequences for the industry ’ s ability to weather weaker economic conditions which are, to be sure, inevitable. from a supervisory perspective, i believe it is time for us to exercise an extra measure of caution. we must ensure that banks ’ lending decisions continue to reflect a disciplined approach, one that matches a clearly defined risk appetite - and a well understood risk capacity - with a real sense of the returns that are necessary to cover that risk. i see such a supervisory approach as increasingly essential to counterbalance the pressures of the fiercely competitive markets in which banks are operating. maintaining sound credit standards is one of several significant challenges banks currently face. another is that the spectacular rise in equity values and mutual funds has put competitive pressure on the core deposit base. as these lower - cost funds have been replaced with funding from the capital markets, principally commercial paper, pressures on interest margins and liquidity have intensified. such funding shifts raise the