We observe financial firms engaging in a variety of ways with fintech companies. This can be through the development of in-house projects such as setting up innovation labs or encouraging developers to code on open application program interfaces (APIs). This can also be through collaboration with industry consortiums to come up with unified industry standards that enhance operability and enable future technological advancements, or it can be through partnering with or investing directly in fintech companies. Some of the interesting questions for supervision revolve around things like: what new benefits might these new technologies bring? Will they enhance existing processes or bring about entirely new solutions to existing financial sector problems? Will they create risk, mitigate risk, or simply reallocate existing risks? How should the current supervisory framework evolve to incorporate these types of developments? The New York Fed is assessing the implications of fintech developments through participation in a wide range of Federal Reserve System, interagency, and  3  “Digital Disruption: How Fintech is Forcing Banking to a Tipping Point,” March 2016. BIS central bankers’ speeches  5  international efforts. In addition, we meet regularly with supervised firms, fintech companies, and industry groups to follow these developments. Our supervisory program will continue to evolve with the underlying technologies. •  Reputation risk Over the past few years, the New York Fed has been challenging the financial industry to consider the many factors that have contributed to recent, widespread misconduct and the perceived lack of trust in the financial sector.

To conclude this section, I’ll note that my colleagues in the Research Group at the New York Fed recently hosted a conference entitled “Supervising Large Complex Financial Institutions: Defining Objectives and Measuring Effectiveness.”1 This conference brought together academic economists, policymakers and senior supervisors to talk about the goals and objectives of supervision and different approaches to assessing supervisory success and effectiveness. While this conference focused on the largest institutions, the main themes apply more broadly to the objectives of supervision. One important theme of the conference was the conceptual distinction between regulation and supervision. Both are designed to help the Fed achieve its objectives and they are mutually reinforcing, complementary efforts. Broadly speaking, regulation involves writing the rules that govern what financial institutions can and cannot do. Supervision focuses on monitoring, oversight and enforcing compliance with law, and supervisory expectations for firms’ governance, internal processes and controls, and financial condition. Why is supervision necessary? I think it is useful to take a step back and talk about what motivates the need for public sector intervention in the form of ongoing supervision. Why doesn’t the market provide sufficient discipline on financial intermediaries as is presumed for some other industries? In the language of an economist, what are the frictions that lead to a market failure so that financial  1  2  Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness. BIS central bankers’ speeches  institutions, left to their own incentives and choices, won’t necessarily make optimal choices from a societal perspective?