might be more potent than we might think. 5 so, i wonder, for example, whether the thought of “ getting caught ” even crosses someone ’ s mind if a prohibition is so routinely disregarded that violating that rule is normal. in the libor and fx cases, for example, traders discussed openly their manipulation of 4 / 6 bis central bankers'speeches reference rates in electronic chat rooms that they knew were recorded and monitored. the fact that those traders used a back channel to communicate evidences an awareness of wrongdoing — not to mention the brazen content of their communication. i have to conclude that the risk of getting caught either never crossed their minds or was massively discounted. on behalf of their firms, compliance personnel can help identify the root causes — especially the situational factors — that contribute to control failures. a thorough and honest exploration of those factors can help inform structural and governance changes mandated in enforcement actions. it is in everyone ’ s interest for those reforms to succeed, to fulfill the mantra of “ never again. ” i do not think this type of inquiry is easy — not because the root causes are unknowable. rather, it may be uncomfortable to ask the right questions. here are some examples. there are sure to be others. are behavioral expectations — and the consequences of violating those expectations — clear? in other words, does the company say, “ this is the conduct we want, and this is how we will hold you accountable for it. ” does the company employ leaders who are visible role models of good conduct and fire those who are not? are systems of compensation and promotion aligned with corporate goals and purposes? and, if there is a pattern of misconduct, are you sure that your incentive programs are based on merit? can the heads of business lines — the people responsible for p & l — explain how it is that each part of their business makes money and manages the associated risks? if not, are they really capable of effective oversight? when misconduct comes to light, does the company assess itself and challenge assumptions with brutal honesty? upon learning of misconduct, is the company willing to intervene in a timely fashion? if there is an emerging pattern of misconduct, how quickly is it identified and addressed? finally, are there particular desks or teams in which everyone is quite junior? too junior, perhaps, to have worked through a down business cycle or the financial crisis? if so, are we giving that area adequate supervision and compliance attention? concluding thoughts i

the models inaccurate. for those interested in a real - life case study of such an outcome, i recommend a paper by scott frame, kristopher gerardi and paul willen about the stress test models used by ofheo, the agency that oversaw fannie mae and freddie mac before the financial crisis. 7 the paper documents the large understatement of the agencies ’ credit risk exposures stemming from “ hard coded ” models that failed to capture innovation in mortgage underwriting. in fact, the fed has proposed additional disclosures about its stress test models, including indicative loan loss rates and loss results based on standardized portfolios. 8 these enhanced disclosures aim to provide greater insight into the fed ’ s modeling approaches and thus to facilitate “ peer review, ” while maintaining the rigor of the stress testing regime. this is another area where academic economists can help enrich the debate. there is already a literature on the impact of the disclosure of supervisory stress test results ; 9 that literature could usefully be extended to consider the impact of underlying model disclosure, especially in the context of macroprudential goals. clear and predictable goals and actions the final element we identified supporting the macroprudential goals of the scap was that the exercise had clear and predictable objectives and actions. our paper argued that the financial crisis environment gave the scap a very clear goal of providing confidence that the banking system could continue to lend even under more dire economic conditions as a way of mitigating the chance that those dire economic conditions actually materialized. in that sense, the scap was very much a “ lean into the wind ” macroprudential exercise. in the current environment, i ’ d argue that the goals of the supervisory stress testing regime are more diffuse. there are clearly microprudential “ safety and soundness ” objectives related to sound capital planning, risk identification and capital adequacy at each of the firms participating in the exercise. these are critically important objectives. the focus on the largest, most systemically important banks also seems consistent with the structural macroprudential channel 5 / 6 bis central bankers'speeches — by reducing the risk that these most systemic firms become distressed, we reduce the risk of the externalities that such distress places on other financial institutions and, most important, on consumers and businesses. what is less clear to me is what role cyclical macroprudential concerns play in the evolving stress testing regime. clearly, the design of the stress test scenarios, which