The purchase of a bank by a commercial firm violates the separate of banking and commerce, and so I wouldn't advise allowing that. But if you do allow it, then it would be better to have consolidated supervision, which includes an overview of the financial condition of the parent - that is, the commercial firm - as well as of the ILC subsidiary.

As supervisors, we want to ensure that loan-to-value standards and debt-service-coverage ratios are meeting the organization’s policies--and that there is not an undue increase in the exceptions to those standards and ratios. We also continue to monitor whether lenders routinely adjust covenants, lengthen maturities, or reduce collateral requirements. To be clear, we have not yet seen underwriting standards fall to unsatisfactory levels on a broad scale, but we are concerned about some of the downward trend in these standards.

We need to continue to adapt our approach to the imperatives of a much more integrated global financial system. Global integration, of course, gives us all a greater stake in the quality of supervision outside our borders. This pragmatic interest will lead us to spend progressively more resources and attention on the international dimension of our work.

We need to find ways to accelerate the pace at which the regulatory framework evolves to meet new challenges. The increase in the pace of change in financial innovation and in market structure requires greater agility among supervisors and regulators. Without this agility we risk lagging too far behind changes in the frontier of risk. This does not mean that each innovation needs to be met with a regulatory response. That would be an unfortunate and surely counterproductive impulse to encourage in regulation.

The Federal Reserve will continue to play an important role in fostering a smoothly functioning payments system that is safe, efficient, and accessible. We also need to be flexible in carrying out our traditional functions within the payments system--as a provider of payment services, regulator, and catalyst for change--in this rapidly changing environment.

The proposed guidance is not intended to cap or restrict banks' participation in the commercial real estate sector, but rather to remind institutions that proper risk management and adequate capital are essential components of a sound CRE lending strategy. In fact, both of these components are already in place at many institutions. No element of the proposed guidance is intended to act as a "trigger" or "hard limit" signaling the need for an immediate cutback in or reversal of CRE lending; rather, the thresholds in the proposed guidance are intended as benchmarks identifying cases for further review.

I noted that CRE underwriting appears substantially better compared to the late 1980s and early 1990s. However, we have noticed some recent slippage. Therefore, the proposed CRE guidance underscores the existing interagency guidance on real estate lending standards.

Banking integration appears to have salutary effects on business cycles by insulating the local economy from the ups and downs of its local banking system, and vice versa.

In addition to enhancing the meaningfulness of regulatory capital measures, Basel II should make the financial system safer by substantially improving risk management at banks.

As the central bank and the supervisor of banks, bank holding companies, and financial holding companies, the Federal Reserve is committed to ensuring that the Basel II framework delivers a strong and risk-sensitive base of capital.

In financial terms, community banks remain quite strong, and there is considerable entry into the business. New technologies and management methods have eroded some of the traditional informational benefits of relationship finance, however, and community banks have lost market share to larger banks and to nondepository institutions. But the data also show that many customers want to be served locally; they value proximity and convenience. In my view, the strong relationships and personalized services provided by community banks remain an important reason for their continuing success.

The federal banking agencies have recently proposed guidance that would focus examiners' attention on those loans that are particularly vulnerable to adverse market conditions--that is, loans dependent primarily on the sale, lease, or refinancing of commercial property as the source of repayment.  I emphasize that, in proposing this guidance, supervisors are not aiming to discourage banks from making sound loans in commercial real estate or in any other loan category. Rather, we are affirming the need for each bank to recognize the risks arising from concentration and to have in place appropriate risk-management practices and capital levels.

The general concern is that, if a commercial firm owns a bank, would there not be a possibility that the safety net would be inadvertently extended to the commercial firm? Would we be able to segregate the financial condition of the commercial firm from the bank? And would it be possible for not just the FDIC, but for any bank supervisor to adequately supervise not only the bank, but also the owning firm, to ensure that the safety and soundness rules were being met?

Nontraditional mortgage products have been available for many years; however, these types of mortgages were historically offered to higher-income borrowers only. More recently, these products have been offered to a wider spectrum of consumers, including subprime borrowers who may be less suited for these types of mortgages and may not fully recognize their embedded risks.

Capital is obviously an invaluable support for the safety and soundness of our banking system...Generally, economic models of capital are tied to unexpected losses. The assumption is that expected losses in the ordinary course of business should be covered by normal operating earnings. For losses beyond the normal range of expectations, sufficient capital should be in place to absorb the loss and leave the financial institution stable and able to continue operating effectively.