for each lender to “ run ” if there is any uncertainty that could undermine the borrower ’ s ability to continue to roll over its funding from other sources. this is the case even if the provider of funds believes that the borrower would remain solvent as long as it retained access to funding on normal terms. of course, this insight is not a new one. prior to the establishment of a lender of last resort and retail deposit insurance for banks – which came with the quid pro quo of prudential regulation – bank runs were a regular and disruptive feature of our financial system. these innovations solved the coordination problem and stabilized this source of funding. what was new prior to the crisis was the extent to which maturity transformation and financial intermediation began to take place outside of commercial banks. this activity occurred largely without the types of safeguards – robust prudential regulation, deposit insurance, lender of last resort – that have safeguarded the commercial banking system from the types of widespread panics and runs that are capable of destabilizing the entire financial system. the risk created by this gap in coverage was not well recognized by regulators or the private sector. market participants had little incentive to internalize the negative externality of run - risk created by their collective choice of finance and made erroneous assumptions about the liquidity of asset markets and the capacity and willingness of banks to distribute central bank liquidity to the wider financial system during periods of stress. a repo is a sale of securities coupled with an agreement to repurchase the securities at a specified price on a later date. market makers are institutions such as securities brokers and dealers that buy and sell securities on behalf of customers. market making accommodates the asynchronous arrival of sellers and buyers, thus providing liquidity to financial markets. conduits are bankruptcy - remote, special purpose vehicles that fund pools of securities in short - term funding markets. the securities might consist of loans, mortgages, receivables and securitized products such as asset - backed securities ( abs ). the securities in asset - backed commercial paper ( abcp ) conduits serve as collateral for the issuance of asset - backed commercial paper, while repo conduits fund in the repo market. most conduits are so - called single - seller conduits that only serve individual banks or finance companies. multi - seller conduits provide funding for asset pools of multiple institutions. con

william l rutledge : supervisory perspectives on compliance for international banks operating in the united states remarks by mr william l rutledge, executive vice president of the federal reserve bank of new york, at the conference of state bank supervisors and the institute of international bankers, new york city, 25 july 2006. * * * thank you, larry. let me add my welcome to those of you coming from abroad. i am sure that the people who are here for an extended tour of duty will find new york city an exciting and engaging place to live and work. and in particular, your area of professional concentration – compliance - has never been more challenging and important. i am sure that message has been evident in the presentations already today and will be a clear point coming through in my remarks. this afternoon, i will offer various observations on the development and nature of supervisory expectations for compliance, particularly as they relate to international banks. i will speak about what i view as the drivers of compliance challenges, and about the implications of these challenges for the supervised firm, for supervisors and, very importantly, for communication between us. drivers of compliance challenges let me begin by singling out two types of drivers of compliance challenges today. first, the dynamics in the global financial services markets have unequivocally led to an increase in inherent compliance exposure. and second, policymakers and regulators are clearly focusing more strongly on compliance risk management, because of recent developments in the corporate and political arenas. so, we have a situation where banks have growing exposure to compliance risk, at the very time that scrutiny of compliance management is intensifying. inherent compliance exposure with respect to the former, inherent compliance exposure is clearly being affected by factors such as financial innovation, globalization and the impact of deregulation within individual countries. i will say a few words about each. new products ( including structured products ) are constantly being introduced, and are being used by an expanding set of market participants, as technology has improved and various market forces have incented behavioral changes. this has led to a number of compliance challenges : • questions for example can arise on how new instruments fit within existing legal and regulatory regimes, • suitability issues can come up, given that new players entering the market may be less sophisticated than the historical set of market participants, and • accounting and disclosure practices are likely to be lagging behind the rapid product innovation. globalization and cross - border expansion present additional challenges, as firms become subject to a broader array of regulatory regimes