The impact of these innovations on the safety and soundness of financial institutions, and on the resilience of the financial system is not always obvious. Regulators must continually seek to identify and manage new and evolving risks, without inhibiting the creativity and dynamism of the markets. As we continued to shift from one-size-fits-all to risk-focused supervision, we modified, adapted and updated specific supervisory practices and methodologies in line with industry developments. In the last year, we have taken steps to more clearly define (1) the objectives or desired outcomes of supervision, (2) the functions MAS performs directly or facilitates indirectly to achieve these outcomes, and (3) the principles that guide our supervisory approach. This will help us to steer through the environment of continuous change and greater uncertainty. We intend to publish the framework of our ideas on these issues. In all areas of supervision, we continue to build up our institutional knowledge. This includes understanding the key risk areas of individual institutions, and how they manage risks. We keep asking this fundamental question: What could go wrong with each institution that we supervise? Then we allocate appropriate supervisory resources, depending on the probability and potential impact of different mishaps. We are also making progress implementing risk-based capital requirements. The risk-based capital requirements for SGX member companies have taken effect in October. The models for insurers have been rigorously tested and will be implemented next year. In banking, where international risk-based capital standards already exist, MAS is working with local banks to prepare for Basel II.

However, the Act envisions oversight of the bank by the appropriate banking agency and functional supervision of individual non-bank subsidiaries that is, SEC oversight of broker/dealers and oversight of insurance companies by state insurance departments. While the Act permits the Federal Reserve, under specifically defined circumstances, to seek information directly from or even examine non-bank subsidiaries of FHCs, the Act also stipulates that the Fed must rely “to the fullest extent possible” on publicly available information, externally audited financial statements, and reports and other information submitted to the functional supervisors. We at the Federal Reserve take this aspect of our revised role - sometimes referred to as “Fed-lite” very seriously. Clearly, it was not the intention of Congress to replace outdated and overly restrictive aspects of Federal banking law with a needlessly onerous and redundant regulatory regime. Moreover, functionally regulated firms should be able to compete on an equitable basis, whether or not they happen to be affiliated with a bank. To minimize regulatory burden and avoid duplication, the twotiered framework of umbrella supervision of financial holding companies and functional regulation of their subsidiaries requires enhanced cooperation and coordination among Federal and state supervisory authorities. Efforts are well underway among the relevant Federal and state financial services authorities to establish agreements and procedures to effectively implement Congress’ mandate. Before moving on, I want to address the topic of community reinvestment in the context of GrammLeach-Bliley.