Framed by this historical perspective, I would like to share with you some of my thoughts on how the public sector can and should work with private financial institutions to maintain financial stability. In particular, I would like to discuss the work that we bank supervisors, and other organizations, do to promote and protect the safety and soundness of our financial systems and institutions. In a complementary fashion, I would also like to discuss the roles of the private and public sectors in preventing and resolving international financial crises. The supervisor’s charge to promote financial stability One does not need to remind bankers in Frankfurt, or for that matter in any country, of the importance of stability to financial markets and organizations. We’ve been reminded of this necessity many times in the modern age, including by the global financial turbulence triggered by the recent crises in emerging countries. Regardless of whether financial systems and institutions face serious and protracted crises or just temporary downturns, bank supervisors in every country have a special responsibility to safeguard the sound operation of their banking systems. This charge consists of two duties. •  To promote stability, supervisors must first encourage banks to manage their risks appropriately to ensure proper safeguards are in place that limit an organization’s vulnerability. This is the duty of prevention. It is critical for supervisors to remember that the primary responsibility for the safe and sound operation of a banking organization rests with its board of directors and senior management.

The philosophy of prevention: assist banks to govern themselves In developing regulations and practices that help to prevent financial crisis, supervisors must not lose sight of the inherent self-interest that banks have to retain the public’s confidence by maintaining safe and sound operations. No responsible firm seeks to fail, and no responsible bank would willingly engage in practices that would cause the market to doubt its long-term viability. Consequently, our role as regulators is not to limit banks’ opportunities for growth and profit. Instead, it is to help banks to improve continuously their abilities to manage their businesses and their risks, thereby ensuring that, across the financial system, banks can maintain their financial health. At the same time, if we are to encourage responsible behavior, we must not create the illusion that we will rescue every institution that does not succeed. In this regard, you will recall Goethe’s view: "What government is the best? That which teaches us to govern ourselves." Similarly, one of the best ways for supervisors to carry out the duty of prevention is by developing regulatory structures that encourage banks and their managers to govern themselves and control their risks. I believe that three important elements in a supervisory structure can help to create such incentives and thereby promote stability. The first consists of the relatively new "risk-focused" approach to bank supervision that is being adopted in financial centers around the world. It embodies a forward-looking perspective focusing most heavily on the risks that each individual bank faces.