WASHINGTON -- Community bankers need to stay on top of a changing business environment if they hope to prosper, Federal Reserve Governor Susan M. Phillips said Tuesday.

"Change creates opportunity, of course, but managing change is a challenge," Ms. Phillips told the Savings and Community Bankers of America conference in Orlando.

"From the Federal Reserve's perspective, We want to ensure that banks offer new prOdUcts only when they- understand these products and can adequately explain the risks to their customers."

She said she is worded because field tests indicate bank customers are investing in uninsured products without knowing the risks.

"I would stress that permitting poor sales practices can be short-sighted at best," Ms. Phillips said. "At best, customer good will can be lost, and at worst, litigation or even unwanted legislation can result."

Bankers also must react cautiously to structured notes, mortgage-backed securities, and similar instruments because it is hard to predict how they will react to changing market conditions, Ms. Phillips said.

Institutions should not invest in these products before adopting adequate internal controls and risk-measurement systems, she said.

"As examiners from the Federal Reserve ... review banks in the future," she said, "you can expect them to devote somewhat more attention to risk management."

Examiners will look for active involvement by directors, clearly stated policies, a review policy, and effective risk-management and internal-control systems.

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