use? more secure? less expensive? does it facilitate better recordkeeping? before customers try a new payment product, they may not be in a position to compare fully how it stacks up with respect to these attributes against the payment method they currently use. unfortunately, in many cases they cannot easily compare the relative cost of the new payment method with an existing method. in this regard, i find it somewhat puzzling that some banks that advocate the migration of retail payments from paper to electronics nonetheless have pricing structures that appear to run counter to that objective. competitive and market issues raised by payments system developments the evolution of the retail payments system raises several interesting issues related to competition. first is the tension between cooperation and competition among providers. cooperation may help ensure interoperability across products of competing service providers and increase providers ’ willingness to accept new technologies and payment system innovations, which can reduce the risk and cost for each participant. competition without coordination among providers may provide the market with a broader choice of payment innovations, but may delay user acceptance and the associated economies of scale and lower prices that may result from volume growth. a related issue is how the evolution of retail payments and the increasing reliance on electronics will affect the competitive balance between small and large financial institutions. to date, small institutions have proved very adept at maintaining their competitive viability. the effects of the widespread use of some of the more recent innovations in electronic banking, however, are unclear. for example, pc banking may free smaller institutions from a heavy dependence on “ bricks and mortar, ” and thus greatly expand their geographic reach. alternatively, it may be that large institutions will have an advantage in being able to support the technical overhead and manage the security concerns required to offer a wide range of banking services on the internet. electronic banking may also have implications for federal reserve policy in several arenas outside of the payments system. while it is too early to say with any certainty what the implications of electronic banking will be, and my comments must therefore be taken as highly speculative, i would like to give you a feel for my thinking by suggesting two areas that i believe are appropriate subjects for strategic thinking. electronic banking may prove to be important in the analysis of the competitive implications of bank mergers and acquisitions. a cornerstone of our current approach for enforcing the antitrust laws is the definition of a local geographic market for the cluster of bank products and services - primarily insured accounts and loans and transaction services to small businesses. on - line banking conducted via a household ’ s or a

are needed that restrict and require disclosure of connected lending to bank owners, shareholders or management. without such regulations, the desire for personal gain may distort the incentives of bank owners and managers to manage risk appropriately. sound practices in risk management at this juncture, it might be useful if i shared with you developments and practices in one country. of course, i am most familiar with my own. throughout the past decade, the federal reserve has devoted increased attention to understanding the risk management practices of us banks and has redirected its supervisory efforts to focus on management processes and areas of ( perceived ) greatest risk. the sheer complexity, volume and pace of transactions in our largest institutions today demand that we evaluate their risks by reviewing the structure and effectiveness of their policies, procedures and controls. while a certain level of “ transaction testing ” remains important to ensure that internal systems work and that controls are real, we can no longer take comfort in the safety of large, complex banks by independently assessing their overall condition at a specific point in time. given the financial products on the market today, risk profiles of complex institutions can change too easily and quickly. we need the assurance that the practices that have kept an institution sound so far are likely to keep it sound in the foreseeable future. us bank managers had earlier come to the same conclusion regarding their own abilities to control individual transactions and positions in their worldwide operations. as a result, they have invested steadily in developing prudent and understandable policies and in improving methods for measuring and managing risks, firm - wide. as their institutions and activities grew, they needed a common measure to compare alternative uses of capital and to evaluate the performance of an expanding range of business lines. the now familiar concept of raroc helped greatly to fill that need. they also required a better process for maintaining quality results, providing management and employees with proper incentives, and detecting problems at an early stage. along with their size and complexity, their demand for stronger and more objective methods of risk management increased. the financial institutions in the vanguard of risk management have tended to be those most active in international capital markets and derivative activities, where participants are most informed, transactions are most efficient and data are most readily available. they were the ones that, most typically, had not only the expertise and resources to develop sophisticated systems for measuring and evaluating risks, but also the need to do so, given the complexity of their transactions and products. they needed to identify the key factors driving market volati