RISKS & RESOLUTIONS: THE “DAY AFTER” FOR FINANCIAL INSTITUTIONS APRIL 15, 2009 Lessons Learned 1

Key Points Financial system developments and leverage Originate to distribute business model Interconnections in the financial system Role of the unregulated or “shadow” banking system Incentives 2

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Originate-to-Distribute Model Market largely shut down Key lessons learned:  Underwriting matters  Does the market understand what it is buying  Transparency, disclosure Complexity or simplicity? Sustainable business model? 6

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Interconnections Complexity of financial system Transformation of risks Lessons learned:  Need to look in more than one place for risks  Stress testing and scenario analysis – what if?  Correlations  Left hand and right hand are in sync 9

Role of unregulated financial system Nonbank world – how much of a driver are they? Lessons learned:  General consistency in practices very important  Risks can build up in places you don’t expect  “Save us from ourselves” 10

Incentives What drives risk taking? What drives risk management? Critical to understanding incentives  Bank and nonbank sector practices  What is the right balance? 11