John Laker, Chairman - American Chamber of Commerce in Australia, Melbourne
I am pleased to renew my acquaintanceship with the American Chamber of Commerce in Australia. When I addressed one of your Business Briefings almost two years ago, it was in a context of uncertainty over the strength of the global economic recovery, concerns about European banks and European sovereign debt, and bouts of volatility in global financial markets. In many respects, unfortunately, the context remains much the same today.
As we know, the aftershocks from the global financial crisis continue to weigh on financial stability and economic growth, particularly in Europe. Policymakers there are grappling with the challenges of structural reform, fiscal consolidation, high unemployment and the recapitalisation of banks. Political developments over the past weekend will make it yet more difficult to enlist public support for the austerity programs underway in Europe.
It is not all gloom, however. Global economic activity appears to have stabilised over recent months and growth prospects are being ratcheted up a little, reflecting improving signs from emerging market economies and expectations of a ‘soft landing’ for the Chinese economy. The US economy is now enjoying moderate growth. However, the jury is still out on how firmly rooted the US recovery is, given the continuing weakness in the US housing market.
In this environment, the performance of the Australian economy stands in positive contrast to that of most other advanced economies. Recent economic growth may have been only modest and it has a patchwork quality, with economic conditions very uneven across industries and regions outside the resources sector. Nonetheless, prospects are for near-trend growth this year and next, the terms of trade remain high, inflation and the unemployment rate are low and the fiscal position strong.
A healthy — even enviable — foundation indeed for the continued strength of the Australian banking system. One might be tempted to recall the adage oft quoted in heady pre-crisis days that ‘a rising tide lifts all boats’. Don’t succumb! What is striking about the current environment is the pronounced caution of Australian households and businesses (outside the resources sector) about their finances. Confidence levels are only at or below their long-run averages. This has reflected in a strong increase in household savings and the slowest pace in credit growth since the early 1990s recession. For Australian banking institutions, accustomed to vigorous balance sheet growth in the years before the crisis, the tide may be rising, but it is doing so only slowly and on a very choppy sea.
My theme is what this low credit growth environment might mean for the Australian banking system. This is not, fortunately, a theme of recapitalisation and the substantial deleveraging that many banks in Europe face — the Australian banking system is profitable and well capitalised. Nonetheless, subdued credit demand brings with it a set of challenges in coming to terms with what I described in our 2011 Annual Report as ‘life in the slow lane’. I will focus on three key issues:
- the strategic challenges in maintaining profitability;
- the management of credit risk; and
- liquidity and funding risks in the face of fragile market sentiment.
would also like to provide an update on two other important elements of our current supervisory agenda: our work on executive remuneration and our newer work on ‘living wills’.
Firstly, some background. Until the crisis, ADIs had benefitted from more than a decade of very strong credit growth, as households and businesses geared up their balance sheets in a low inflation, low interest rate environment. Annual credit growth averaged around 12 per cent between 1995 and 2008 and fell into (high) single-digit rates for only brief intervals. This credit growth was the key driver of revenue and profitability for the majority of ADIs for many years. In sharp contrast, credit growth is currently running at only one-third of that previous average rate. Growth in lending for housing is at its lowest recorded rate while business lending has only recently returned to positive territory.
In an environment of lacklustre credit demand, ADIs will have to look elsewhere and work harder to maintain profitability. This is not a simple proposition. There is also pressure on profitability from other angles. Net interest rate margins, for example, have been dampened by more expensive deposit funding costs and higher bank risk premia in global funding markets. And the boost to profitability in recent years from lower bad and doubtful debt charges is likely to wane. Looking ahead, ADIs will also be required to operate with larger capital bases, maintain increased holdings of lower yielding but higher quality liquid assets and adopt more prudent funding profiles as they make the transition to the Basel III reforms.
In the face of these constraints, strategic ambitions will be crucial in determining how ADIs negotiate the slow lane and maintain their financial strength and profitability in a durable way. For this reason, APRA is placing high priority on the oversight of ADI strategies as part of its supervisory efforts, including in its regular discussions with boards and senior management. Before the crisis, strategic ambitions were often couched in terms of ‘above system’ rates of growth and the achievement of such rates was a commonly used metric of success. It is a metric, however, that may have no regard for the quality of assets going onto the balance sheet.
These days, we see little unbridled ambition expressed in this form. Where we do, we will challenge the board and senior management on whether growth targets can be realistically achieved through superior products or services or whether the institution is at risk, in colloquial terms, of ‘taking in others’ washing’.
The more common strategic response of ADIs to the current slow growth environment emphasises one or more of the following elements:
- increasing efficiency and enhancing productivity through cost-cutting;
- technological innovation; and/or
- expansion into new markets and products.
The average cost-to-income ratio for ADIs in Australia is around 51 per cent. For the major banks, the ratio is around 45 per cent. This figure has fallen significantly over the past decade to a level that is low from an international perspective; many large banks in other advanced economies operate with cost-to-income ratios in the 50s or 60s.
Since staff expenses typically account for around half or more of total operating costs, it is not surprising that many ADIs — large and small — are targeting staff reductions as part of efficiency programs; in some cases, this may involve outsourcing or offshoring operations. APRA does not have an issue with cost-cutting per se; the level of staff expenses is quite properly a matter for boards and senior management. APRA’s concern is how cost-cutting might be achieved. Risks arise when efficiencies are sought through reductions in critical support functions and underinvestment in risk management capabilities. This would leave ADIs more exposed in the event of any future deterioration in economic conditions, with weaker risk control frameworks at a time when they are most required. Cutbacks to risk management staffing because they seem an easy cost centre target, not because the ADI has reined in its risk appetite or exited certain activities, is a short-sighted approach that we would want to strongly challenge.
Outsourcing and offshoring is becoming a more frequently trod path to finding efficiency gains. APRA supervisors have been scrutinising ADIs’ existing outsourcing and offshoring arrangements and related plans for the future. Supervisors look for assurance that plans to outsource or offshore key functions are not opportunistic but part of a well-considered strategy, with risks clearly identified and managed. We are also particularly keen to ensure that ADIs can disentangle arrangements and provide seamless continuity of service to customers in the event of problems with an outsourced service provider.
Let me be clear — APRA is not opposed to outsourcing. However, ADIs need to recognise that while outsourcing may reduce costs, it always reduces control — control over resourcing, timelines and communication. While outsourcing can also reduce risks where functions are taken over by well-trained specialist providers, core expertise leaves the ADI, possibly never to return. And poor control over outsourced service providers can actually lead to higher costs in the long run. As a result, we are increasingly convinced that major outsourcing projects require close involvement of ADI boards to ensure that the trade-offs involved are well understood and that the risks are being considered in a transparent manner.
APRA has begun asking ADIs to define their risk appetite around outsourcing and offshoring, just as they define a risk appetite for credit or market risk. This is often a new and difficult task for ADI boards and management. Nonetheless, ADI boards should be thinking about the type of functions that would always be provided ‘in house’, how much expertise they want to relinquish to service providers, their tolerance on the trade-off between costs and control, and what additional risk controls are appropriate where activities are provided from higher-risk locations.
Technological innovation is increasingly being seen as a means of strategic differentiation by ADIs and a driver of increased efficiency and improved productivity. The reach of technology in banking is pervasive, from back-office accounting systems to the customer-friendly ways that most Australians now do their banking. Technology often features prominently in ADIs’ capital investment programs as well as operating expenses.
APRA is neutral about the particular technology choices made by ADIs. However, we do take a close interest in technological change because of the heightened operational risks that can be associated with system improvements. A number of ADIs are in the process of or are planning for replacement of their core banking systems. There are considerable risks in doing so, reflecting the age, scale and complexity of these systems. APRA’s supervisors and technology risk specialists require regular updates on these core system replacement programs to assess the risks arising from major technology projects.
Technology is also an area that might be vulnerable to a CFO’s razor in the current environment. While APRA is not seeing evidence of any material reduction in IT budgets, it is important that the progress made by the industry in recent years to improve the resilience of banking systems is not undermined or put into reverse. As we all know, a number of ADIs have experienced problems involving payment system outages and denial of service attacks. In our view, the replacement of obsolete systems must remain a priority, as must the upgrading of outdated operating systems, hardware and software. In this area, APRA’s role is to promote the right incentives, governance and transparency to ensure that ADIs are dedicating the necessary effort to the task.
APRA is also building up its understanding of the technology functions and capabilities that ADIs have outsourced (including offshoring and cloud computing services) and any potential reliability issues. On the latter, we expect ADIs to know where their data are being hosted, stored and backed up at all times and to define their comfort levels in having sensitive data or operations offshore. We have recently sent a team of supervisors to IT centres in India, and elsewhere in Asia, that support the operations of ADIs and we are likely to do more of this work.
Expansion into new markets and products
Unlike many of their international peers, Australian ADIs operate largely within their home market. There is no major Australian bank, for example, on the Financial Stability Board’s list of 29 global systemically important banks announced in November 2011 and over 90 per cent of the loan books of the major banks are based in Australia and New Zealand. In a slow growth environment, however, the appeal of offshore markets inevitably increases. Asia, in particular, is a key target market given its geographical proximity, existing trade flows and high economic growth rates.
Offshore expansion is unlikely to be a sudden strategic transformation, especially given the low starting base. However, the allure of further investment offshore in the current environment is clearly apparent. Some larger banks with established footprints have already set targets for the proportion of business to be generated from their overseas operations while others are expanding offshore at a slower pace.
In APRA’s view, expansion into new markets and products — whatever the direction — needs to be supported by rigorous planning and enhancements in risk management. Without this, an ADI can become exposed to volatile economic and market conditions in offshore markets, potential deterioration in credit quality and an increase in strategic and reputational risk. In offshore markets, ADIs face competition from both local and other international banks, regulatory hurdles such as limits on foreign ownership, and economic, cultural and legal differences, all of which can complicate strategic objectives. For these reasons, APRA supervisors will be alert to the risks associated with major shifts in strategy that take an ADI beyond its existing core markets and competencies. Our supervisors will test whether new market initiatives reflect genuine competitive advantages, are supported by appropriate due diligence and oversight, and fit within the ADI’s risk appetite, organisation skills and risk control frameworks.
The management of credit risk
I want to turn now to the implications of a subdued credit growth environment for the management of two of the main types of risk facing ADIs. Firstly, credit risk, which always receives our close attention. Not surprisingly, we weight credit risk as the highest inherent risk facing ADIs in our risk-rating framework.
Since the crisis began, ADI credit quality has proven to be significantly more robust than in most other advanced economies. Nonetheless, ADIs did not escape unscathed from credit quality problems. For banks, the non-performing loan ratio rose sharply in 2008 and peaked at around 1.7 per cent in 2010. This is well below historical experience and the levels experienced in some North Atlantic banking systems — the figure is around six per cent in the United Kingdom and the euro area and in double-digits in Ireland — but this is no cause for complacency. The non-performing loan ratio has changed little since its peak and the patchwork economy is being reflected in a relatively constant inflow of newly impaired assets.
Problem loans have been highest in business lending and loans secured by commercial property. In the early phase of the crisis, APRA focussed most closely on these exposures, particularly commercial property exposures that were a key source of credit losses for some ADIs. By scaling back both the volume and the concentration of their commercial property lending, tightening their underwriting standards, applying more conservative loan-to-valuation ratios (LVRs) and stronger covenants, ADIs appear to have largely cauterised their losses from this form of lending.
Over the past year and more, APRA has shifted its attention to credit quality in ADI housing lending. This form of lending accounts for the largest proportion (over 60 per cent) of lending by ADIs in Australia, a higher proportion than in many other major banking systems. Housing lending has been a sound asset class for ADIs over a long period. That said, the non-performing loan ratio of around 0.7 per cent, although low by international standards, is well above its level prior to the crisis. Given the high gearing of Australian households, the concentration of housing lending on ADI balance sheets and signs of weakness in housing prices in some areas, our focus on housing lending is understandable.
The subdued credit environment has the potential to magnify credit risk in housing lending by intensifying competition for a slowing growing pool of borrowers. Our supervisors and credit risk specialists therefore remain on the lookout for any changes in risk appetite and lending strategy, variations in credit quality across different geographical regions, and the robustness of governance, credit standards and risk management controls. Broadly speaking, ADIs appear at this stage to be maintaining relatively tight credit standards, having reined in their risk appetite since the crisis began. For example, the proportion of ‘low doc’ housing lending has dropped markedly since 2008 as ADIs have moved to eliminate this product offering, at least in its riskier guise. On the other hand, new housing lending with LVRs above 90 per cent, a riskier type of housing loan given the highly leveraged position of the borrower, has been more responsive to competitive pressures and the proportion started to drift up again in 2011.
Of course, APRA is only one of a number of ‘lines of defence’ on credit quality. The first and foremost lines of defence are the boards of ADIs, which set the risk appetite for their institution and approve the credit framework. As we have mentioned elsewhere, APRA wrote to the boards of larger ADIs in 2011 to remind them of the need to be alert to any deterioration in credit standards in housing lending. We sought, and received, assurances that the Board is actively monitoring its housing loan portfolio; is comfortable with its current credit standards; is closely tracking the level and type of exceptions to its lending policies; is reviewing its credit provisioning practices; and that planning and remuneration arrangements are reflective of the more subdued market environment. We also cautioned boards to be alert to over-ambitious lending growth or market share targets that do not reflect the current subdued pace of mortgage lending.
Another important line of defence are the external auditors of ADIs, and we have enlisted them to our cause through our targeted review program. In 2010/11, the topic of the targeted review was collateral management and foreclosure management. Recent overseas experience, particularly in the United States, has highlighted the importance of having appropriate policies, procedures and resources to manage problem loans and dispose of the collateral. Inadequate documentation, inflexible systems or inaccurate valuations can translate into higher credit losses. The targeted review of a number of larger ADIs by their external auditors found no material deficiencies in collateral management but identified common areas for improvement. These included the completeness and accuracy of data in collateral management systems, valuation policies and practices, and the level of detail in foreclosure contingency plans.
The topic of the targeted review in 2011/12 is housing loan approval standards, focusing on the income tests that ADIs use to assess whether borrowers can afford the interest and principal repayments on their loans. Loan serviceability criteria, as they are called, are a critical part of the approval process: weaknesses in serviceability policies can quickly lead to increases in the volume of loans defaulting in an economic downturn. In Australia, the very high proportion of variable rate housing lending means that housing credit quality is more sensitive to changes in interest rates than in many other jurisdictions. Further, debt interest payments as a proportion of disposable income, though falling recently, remain quite elevated compared with the experience of earlier decades.
Against this background, the targeted review asks external auditors to assess the strengths and weaknesses of the serviceability criteria used for housing loan approvals by the ADIs involved. This includes an examination of the different kinds of serviceability calculators used by the ADI. The scope of the review encompasses not only the ADI’s serviceability policy and any changes to the policy in the past year, but also an assessment of how the policy has worked in practice, including the nature and frequency of policy ‘overrides’.
Liquidity and funding risks
The acute dislocation in global funding markets in late 2011 has been a reminder, yet again, of the importance of ADIs having strong liquidity and funding positions. In a rerun of October 2008, investor risk aversion intensified in response to escalating concerns over sovereign debt and banking sector problems in Europe, and funding spreads widened beyond the point where banks were willing to issue. Global long-term unsecured funding markets effectively shut down to banks, whatever their origin. Funding conditions have improved in 2012, wholesale funding costs have declined and the larger Australian banks have significantly increased their bond issuance, particularly through covered bonds. Nonetheless, market sentiment remains fragile. APRA has maintained a close watch on financial market conditions since the crisis began and an enhanced range of supervisory activities are now embedded into routine supervision. Given the potential for further market volatility, we expect to remain on high alert for some time to come.
Liquidity and funding is one area where continued household and business caution and the low credit growth environment are a benefit, not a constraint. Lower credit growth and high rates of saving are positive dynamics for ADI balance sheets: weaker asset growth reduces overall funding demands while the high rates of saving have reflected in strong deposit inflows. ADIs have taken advantage of these conditions to put themselves on a stronger balance sheet footing. In the case of banks, domestic deposits now account for over 50 per cent of funding, up from 40 per cent in 2007 and the highest share since 1998. The share of short-term wholesale funding has shrunk by a similar proportion since 2007 and the duration of wholesale funding has been pushed out. ADIs have also been building up their holdings of cash and liquid assets.
One measure of funding resilience to which a number of commentators attach importance is the loan-to-deposit ratio. This ratio has fallen by around 10 percentage points from its peak of around 127 per cent in 2006, confirming the higher proportion of lending funded from more stable funding sources. I would add that APRA places no particular store on this ratio as a prudential measure. It is, in fact, a simplification of the Net Stable Funding Ratio that forms part of the Basel III global liquidity reforms, and on which we would prefer to concentrate our efforts.
In the area of liquidity and funding risk, APRA is currently heavily engaged on two fronts: day-to-day frontline supervision, in constant dialogue with ADI treasurers and the Reserve Bank of Australia, and the longer-term preparations for the introduction of the Basel III global liquidity reforms in Australia.
APRA’s frontline supervisors, working together with dedicated liquidity risk specialists, routinely review (and interrogate) ADIs’ funding plans, benchmark projections of forward funding requirements and scrutinise future balance sheet targets. As I have noted, there is no single measure of balance sheet resilience and each ADI needs to set its own internal metrics and trigger levels that are meaningful for the ADI and how it views liquidity and funding risk.
Increasingly, we are seeing better managed ADIs explicitly defining their risk appetite for liquidity and funding risk. Boards should be asking questions of their treasurers such as ‘How long could the ADI operate profitably without access to offshore wholesale funding or securitisation markets?’ ‘How long could we operate without the ability to issue short-term debt?’ ‘What is the risk/return trade-off in lengthening the maturity profile of wholesale funding by one month? One year?’ ‘What is our tolerance for relaxing our risk appetite and what are the consequences?’ Increasingly, boards are asking ‘Do we want to rely on short-term funding markets to fund loan growth at all?’ This focus on risk appetite is leading to a change in mind-set among retail and business bankers, where the garnering of sticky deposit funding counts and is being built into business targets.
The Basel III liquidity reforms are aimed at strengthening the resilience of the global banking system to liquidity stress. One particular aspect of these reforms on which APRA will be in active dialogue with ADIs will be the use of the Committed Liquidity Facility available from the Reserve Bank of Australia to enable ADIs to meet their Liquidity Coverage Ratio requirements (from 2015). ADIs will need to demonstrate to us that they have taken all reasonable steps towards meeting their LCR requirements through their own balance sheet management, before relying on the Facility. As a minimum, ADIs will need to demonstrate that they have increased the duration of their liabilities and maximised reliance on stable sources of funding to the greatest reasonable extent. In this context, though recent reductions in reliance on short-term wholesale funding are welcome, further reductions in this source of funding for longer-term assets will be expected. Such a move will be prudent in its own right. It will also bolster the confidence of investors, credit rating agencies and global bodies like the International Monetary Fund that the Australian banking system is serious about reducing its vulnerability to disruptions in global funding markets.
In April 2010, APRA introduced new requirements in relation to executive remuneration in the ADI (and insurance) sectors. Our objective was clear. The crisis is testimony to what can happen when misaligned remuneration arrangements provide incentives for excessive risk-taking, encouraging an accumulation of risk rather than its prudent management. Responsibility for the remuneration framework within a regulated institution starts and ends with the board and, for that reason, our remuneration requirements were introduced through our governance standards.
Our remuneration requirements are not ‘set and forget’. This is a new area of work for supervisory agencies and we have been building up our expertise and our understanding of remuneration arrangements in the search for better practice. APRA’s supervisors have been monitoring progress on implementation, conducting peer comparisons for a number of selected institutions and, more recently, have met with a number of Board Remuneration Committees for more detailed review. There will be no public ‘scalps’ from this work. Our focus is not on the size of executive packages but how they are structured.
Four principal themes emerged from these meetings.
The first centred on the governance and operation of the Remuneration Committee itself. All of the boards we met with had well-established Remuneration Committees, with reasonably clear and robust governance arrangements and strong linkages to the Board Risk Committee. In a limited number of cases, however, there seemed to be a degree of tension between the roles of the board and the Chief Executive Officer. While the latter should be a source of advice and input, ultimately the structure and outcomes of remuneration arrangements for senior executives are decisions that lie with the board alone.
The second centred on the coverage of the remuneration policy. There appeared some inconsistencies across the institutions in the extent of board approval of the remuneration of material risk-takers below the senior executive level. There were also cases where the remuneration arrangements of executives in a group subsidiary were not receiving scrutiny at board level.
Thirdly, approaches to the use of performance scorecards to determine remuneration varied widely. The design and application of scorecards is critical to ensuring risk and reward are properly aligned. A scorecard based solely on judgment does not provide a sound basis for remuneration decisions while an entirely mechanical or formulaic approach prevents Remuneration Committees from providing a sensible overlay where key performance indicators do not present a true measure of an individual’s performance. APRA favours a balanced approach combining both clear metrics and judgment, and taking risk-related considerations explicitly into account. This can work best where the Risk Committee or the Chief Risk Officer has direct input into Remuneration Committee decisions.
The fourth theme centred on the structure of remuneration arrangements. Almost all institutions that APRA met with use a combination of short-term and long-term incentives for senior executives. For both types of incentives, there was welcome progress in extending deferment terms, consistent with the intent of our remuneration requirements. However, the ability to clawback unvested payments was not always evident. For some institutions, the scope for withholding unvested payments if, for example, there was subsequent evidence of financial misconduct was very restricted.
The concept of ‘living wills' has arisen out of the commitment of global policymakers to strengthen the powers and tools available to supervisory agencies to restructure or resolve financial institutions in crisis. The concept is central to global reforms designed to ensure that systemically important financial institutions can remain operational in the event of severe distress, in a way that minimises adverse systemic impact and the need for taxpayer assistance.
As we have explained elsewhere, the term ‘living will’ refers to two separate but related matters:
- ‘recovery plans’, in which a financial institution sets out the actions it would take to survive a severe crisis; and
- ‘resolution plans’, which focus on measures that would enable a cost-effective resolution of the institution by the authorities where recovery is not possible.
In many ways, this type of planning is not a new discipline for the banking system. Contingency planning, business continuity plans and capital raising options have been part of the toolkits of banking institutions for some time. What is new is the depth to which this planning is now expected to reach, the severity of the scenario that could be envisaged and the preparatory steps that may need to be considered to ensure actions are genuinely deliverable in a stressed environment.
In July 2011, the Financial Stability Board released proposed guidance for the effective resolution of financial institutions in distress. The guidance is directed at systemically important financial institutions but clearly has much wider relevance. The guidance has provided the context for APRA’s work on living wills and, as with other areas of prudential regulation, our approach will be tailored to the particular circumstances of the Australian financial system. We therefore started with a pilot program on recovery planning involving a number of the larger ADIs. These were asked to prepare a comprehensive recovery plan identifying a ‘menu’ of actions that could be deployed to restore financial soundness in the event of a major depletion of capital and associated liquidity pressures. The recovery actions needed to provide a material benefit to capital and funding within a reasonable period of time, and be credible and realistic.
Draft recovery plans were received from the larger ADIs at the end of 2011. While these plans are generally well advanced in scoping out potential recovery actions, APRA has identified certain areas that need improvement before final plans are submitted. These include the need to consider potential execution risks associated with recovery actions, to establish realistic valuations for the estimated financial benefits of specific actions and to ensure that the plan can be delivered within a reasonable timeframe to have a credible impact on investor confidence. We know from overseas experience how quickly such confidence can erode in a crisis.
The draft plans have also highlighted the need to consider preparatory steps that could be taken now to improve the deliverability of recovery actions if called upon. Such ‘pre-positioning’ might, for example, include changes to organisational or legal structures or the preparation of documentation ahead of time to facilitate potential transactions or capital initiatives. Some of these preparatory actions are relatively low cost and APRA expects they will be given careful consideration before the boards of the larger ADIs approve and sign-off on their recovery plans by June this year.
APRA will be broadening its recovery planning program once the results of the pilot program become clearer. The draft plans have already given APRA a better understanding of the strategic and operational complexities association with planning and implementing recovery actions and have helped to shape our thinking on the application of recovery planning beyond the larger ADIs. Recovery planning will become a permanent feature of our supervisory framework.
On an earlier occasion, I opined that one of the main lessons APRA has learned from the crisis has been the importance of a pre-emptive supervisory approach. As we see it, our most meaningful contribution to the resilience of Australian banking institutions during the crisis came from our efforts to promote their financial health prior to the crisis. My tour d’horizon of our supervisory agenda today should be seen in this same context. It is an agenda focussed not on dealing with the fallout from the crisis — we are no longer putting out spot fires — but with ensuring that our ADIs will be well-prepared to cope with the next crisis, whatever its origin.
Many elements of our supervisory agenda — particularly our close attention to credit risks and liquidity and funding risks — are enduring items. They are at the heart of our supervision of ADIs. What has kept the agenda intense is that ADIs are operating in a quite different environment than in pre-crisis days, when strong balance sheet growth seemed assured, and in the early crisis period, when ADIs moved into very protective mode. The current operating environment can perhaps be described as one of slow grind. As I have discussed, this presents a set of challenges — strategic, technological and competitive — and may bring temptations for greater risk-taking. To date, the slow grind has not been incompatible with solid profitability, certainly for the larger ADIs, but such an outcome remains in prospect only if wise heads in ADI boards and management continue to prevail.