Mr. Mario Draghi, Chairman Financial Stability Board Bank for International Settlements Centralbahnplatz 2 CH-4002 Basel Switzerland Dear Mr. Draghi: On behalf of the Senior Supervisors Group (SSG), I am writing to convey Risk Management Lessons from the Global Banking Crisis of 2008, a report that reviews in depth the funding and liquidity issues central to the recent crisis and explores critical areas of risk management practice warranting improvement across the financial services industry. This report is a companion and successor to our first report, Observations on Risk Management Practices during the Recent Market Turbulence, issued in March 2008. The events of 2008 clearly exposed the vulnerabilities of financial firms whose business models depended too heavily on uninterrupted access to secured financing markets, often at excessively high leverage levels. This dependence reflected an unrealistic assessment of liquidity risks of concentrated positions and an inability to anticipate a dramatic reduction in the availability of secured funding to support these assets under stressed conditions. A major failure that contributed to the development of these business models was weakness in funds transfer pricing practices for assets that were illiquid or significantly concentrated when the firm took on the exposure. Some improvements have been made, but instituting further necessary improvements in liquidity risk management must remain a key priority for financial services firms. In the attached report, we identify various other deficiencies in the governance, firm management, risk management, and internal control programs that contributed to, or were revealed by, the financial and banking crisis of 2008. Our report highlights a number of areas of weakness that require further work by the firms to address, including the following (in addition to the liquidity risk management issues described above): ⢠the failure of some boards of directors and senior managers to establish, measure, and adhere to a level of risk acceptable to the firm; ⢠compensation programs that conflicted with the control objectives of the firm; ⢠inadequate and often fragmented technological infrastructures that hindered effective risk identification and measurement; and ⢠institutional arrangements that conferred status and influence on risk takers at the expense of independent risk managers and control personnel. In highlighting the areas where firms must make further progress, we seek to raise awareness of the continuing weaknesses in risk management practice across the industry and to evaluate critically firmsâ efforts to address these weaknesses. Moreover, the observations in this report support the ongoing efforts of supervisory agencies to define policies that enhance financial institution resilience and promote global financial stability. http://www.sec.gov/news/press/2009/report102109.pdf