the reputations of both the companies engaging in the transactions and their financial advisers - and, in turn, impaired public confidence in those institutions. these potential risks and the resulting damage are particularly severe when markets react through adverse changes in pricing for similarly structured transactions that are designed appropriately. assessments of the appropriateness of a transaction for a client traditionally have required financial firms and advisers to determine if the transaction is consistent with the market sophistication, financial condition, and investment policies of the customer. given recent events, it is appropriate to raise the bar for appropriateness assessments by taking into account the business purpose and economic substance of the transaction. when banking organizations provide advice on, arrange, or actively participate in complex structured finance transactions, they may assume legal and reputational risks if the end user enters into the transaction for improper purposes. legal counsel to financial firms can help manage legal and reputational risk by taking an active role in the review of the customer ’ s governance process for approving the transaction, of financial disclosures relating to the transaction, and of the customer ’ s objectives for entering into the transaction. on the regulatory side, the federal reserve has been working with the other federal banking agencies and the securities and exchange commission to develop interagency guidance on complex structured finance transactions. we believe it is important for all participants in complex structured finance transactions to understand the agencies ’ concerns and supervisory direction. our goal is to highlight the “ lessons learned ” from recent events as well as what we believe on the basis of supervisory reviews and experience, to be sound practices in this area. as in other operational areas, strong internal controls and risk - management procedures can help institutions effectively manage the risks associated with complex structured finance transactions. here are some of the steps that financial institutions, with the assistance of counsel and other advisers, should take to establish such controls and procedures : • ensure that the institution ’ s board of directors establishes the institution ’ s overall appetite for risk ( especially reputational and legal ) and effectively communicates the board ’ s risk tolerances throughout the organization. • implement firm - wide policies and procedures that provide for the consistent identification, evaluation, documentation, and management of all risks associated with complex structured finance transactions - in particular, the credit, reputational, and legal risks. • implement firm - wide policies and procedures that ensure that the financial institution obtains a thorough understanding of the business purposes and economic substance of those transactions identified as involving heightened legal or reputational risk and that those transactions are approved

such as its legal structure, each economy will achieve its maximum possible average living standard. indeed, the group of seven leaders, at their 1977 economic summit, identified inflation as a cause of unemployment. this had not always been the case. for example, wage and price controls were imposed in the united states in 1971 as a substitute for a tighter monetary policy and higher interest rates to address rising inflation. century, but a related measure - - the extent to which savers reach beyond their national borders to invest in foreign assets - - has also risen. through much of the post - world war ii years, domestic saving for each country was invested predominantly in its domestic capital assets, even when there existed the potential for superior riskadjusted returns from abroad. because a country's domestic saving less its domestic investment is essentially equal to its current account balance, such balances, positive or negative, were therefore generally modest, with the exception of the mid - 1980s. but in the early 1990s, " home bias " began to diminish appreciably, and, hence, the dispersion of current account balances among countries has increased markedly. the widening current account deficit in the united states has come to dominate the tail of the distribution of external balances across countries. nonetheless, the worldwide dispersion of current account balances has risen since the early 1990s, even excluding the united states. 4 thus, the decline in home bias, or its equivalent, expanding globalization, has apparently enabled the united states to finance and, hence, incur so large a current account deficit. as a result of these capital inflows, the ratio of foreign net claims against u. s. residents to our annual gdp has risen to approximately one - fourth. while some other countries are far more in debt to foreigners, at least relative to their gdps, they do not face the scale of international financing that we require. a u. s. current account deficit of 6 percent of gdp would probably not have been readily fundable a half - century ago or perhaps even a couple of decades ago. 5 the ability to move that much of world saving to the united states in response to relative rates of return almost surely would have been hindered by the far - lesser degree of both globalization and international financial flexibility that existed at the time. such large transfers would presumably have induced changes in the prices of assets that would have proved inhibiting. nonetheless, we have little evidence that the economic forces that are foster