Risk management and internal controls should be spared from the cost-cutting frenzy that is spreading throughout the industry, said Federal Reserve Board Governor Susan M. Phillips.

Addressing the Bankers Association for Foreign Trade on Tuesday, Ms. Phillips said spending a few dollars now on internal controls could save banks millions later.

"Investment in proper controls can guard against large, perhaps even franchise-endangering, losses," she said.

Ms. Phillips also warned bankers to be especially wary during mergers. She said the internal controls that monitor derivatives and other risky instruments can be thrown into "disarray" when two institutions combine.

"Mergers, therefore, must take place with a high level of attention to internal controls, especially during the transition phase, so that risk exposures do not escape management's attention," she said.

Ms. Phillips added that risk management is here to stay. Examiners will review an institution's internal controls, whether they relate to complex new products or traditional lending activities.

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