to curb abuses while preserving access to credit. we have invited people representing all sides of the debate to present their views. we have also used, and will continue to use, supervisory guidance to help mitigate problems in the subprime sector. earlier this year, the board and other federal bank and thrift regulators issued draft supervisory guidance to address concerns about underwriting and disclosure practices, particularly of subprime arms. many industry and consumer groups have responded to our proposal, and we are now reviewing the comments. regulators in 1999 issued guidance on subprime lending and in 2001 expanded that guidance. last year, we issued guidance concerning so - called nontraditional mortgages, such as interest - only mortgages and option arms. for both subprime and nontraditional mortgages, our guidance has reminded lenders of the importance of maintaining sound underwriting standards and of providing consumers with clear, balanced, and timely disclosures about the risks and benefits of these mortgages. the patchwork nature of enforcement authority in subprime lending – in particular, the fact that the authority to make rules and the responsibility to enforce those rules are often held by different agencies – poses additional challenges. for example, rules issued by the board under tila or hoepa apply to all mortgage lenders but are enforced – depending on the lender – by one of five federal regulators of depository institutions, the federal trade commission ( ftc ), or state regulators. to ensure consistent and effective enforcement, close cooperation and coordination among the regulators are essential. the board remains committed to working closely with other regulators to achieve uniform and effective enforcement. we can continue to improve the sharing of information and the coordination of some activities, such as examiner training, through the federal financial institution examination council, which the conference of state banking supervisors ( csbs ) recently joined, as well as through other channels, such as the csbs ’ s state / federal working group. we will also draw on the expertise of other regulators as we consider changes in required disclosures and rules. macroeconomic implications the problems in the subprime mortgage market have occurred in the context of a slowdown in overall economic growth. real gross domestic product has expanded a little more than 2 percent over the past year, compared with an average annual growth rate of 3 - 3 / 4 percent over the preceding three years. the cooling of the housing market is an important source of this slowdown. sales of both new and existing homes have dropped sharply

. since an exchange does not stand between the two sides of the trade, parties make payments directly to each other to honor the terms of the contracts. the market practice is to use collateral or pricing to mitigate the risk that the other side of the trade cannot perform per the agreement. the recent industry study also found that competitive pressures were such that brokers did not enforce the standard cds agreement and allowed counterparties to assign their side of the trade to another party without notifying the broker. obviously, this can significantly change the risk profile of a transaction and also make it very difficult to settle payments in a timely manner. about six weeks ago, fourteen major market participants published a letter reiterating their commitment to improving the infrastructure that supports the credit derivatives markets. the market participants are committed to the development and implementation of a set of industrywide guidelines that include a targeted reduction in each market participant's confirmation backlogs and assurance that agreement terms will be enforced. additionally, the fourteen participants will work to create a largely electronic marketplace where all trades will be processed through an industry - accepted platform, develop a new set of processing standards for those trades that cannot be confirmed electronically, and establish a new procedure for settlement following a credit event. we are generally pleased with both the industry's self - identification of the issues and its commitment to making improvements. but for purposes of our discussion of erm today, the problems surrounding cds sales highlight the challenges risk managers face when market pressures make the firm's line management reluctant to initiate appropriate controls on their own. it also illustrates that in new lines of business, sometimes erm must go outside the enterprise and work with competitors to support the growth of shared systems and standards to mitigate risks. conclusion at the federal reserve, we believe that all banking organizations need good risk management. an enterprise - wide approach is appropriate for setting objectives across the organization, instilling an enterprise - wide culture, and ensuring that key activities and risks are being monitored regularly. senior management must be involved in erm, since they are the ones who decide the level and types of risk the organization is comfortable with accepting and what controls and risk mitigants will be employed to ensure that risk exposures stay within the agreed - upon levels. in addition, it is important for organizations to make sure they do not ignore or accidentally overlook lower - profile activities that still might bear substantial risks. as i noted, such activities can include financial statement reporting, information security, and back - office