includes the costly crisis of the us savings and loan industry - - which is composed of institutions chartered to make home loans available to the american public. in response to these systemic developments, bankers and supervisors each changed their fundamental ways of operating and managing risks. for their part, bankers recognized the need to rebuild their capital and reserves ; strengthen their internal controls ; diversify their risks ; and improve internal risk management systems. the federal reserve, in turn, responded to these changes by adopting its risk - focused examination system tailored to assessing the quality of individual banks ’ internal processes and risk management systems. the need for this approach is illustrated by the failure of several high - profile international banking organizations that did not have adequate internal control and risk management systems. adopting a risk - focused approach improves the examination process by targeting examinations more directly on specific institutions ’ problems. however, it also makes such examinations more challenging for examiners because they must be knowledgeable about each bank ’ s business activities, risk profiles, and risk management systems. furthermore, we are trying to make these examinations more efficient for examiners and bankers by employing valid statistical sampling methods, which will free examiner time to devote to banks ’ specific risk exposures. in addition, banking supervisors need to assess the integrity and independence of a bank ’ s decision - making processes, giving special attention to any conflicts of interest or insider influence that could distort this process. the basle committee ’ s core principles for effective banking supervision address this point by recognizing the need for effective measures to control directed lending and transactions with affiliates that are not on an arm ’ s - length basis. specifically, the core principles state that, to prevent abuses arising from connected lending, banking supervisors should require that any loans banks make to related companies and individuals be on an arm ’ s - length basis ; that such extensions of credit be effectively monitored ; and that other appropriate steps are taken to control or mitigate the risks. for example, the federal reserve ’ s regulation o, whose application was expanded to directors in the early 1990s, is aimed at making sure that any loans a bank makes to officers or directors are on the same terms that are available to the general public. finally, the federal reserve places great reliance on on - site examinations to make the presence of supervisors tangible to bankers and to facilitate the review of records and documents that are essential to assessing a bank ’ s financial condition. such on - site examinations also permit examiners to observe whether bank policies are being followed in practice,

four themes that i have highlighted today - - the benefits of risk - focused supervision, the value of sound accounting and disclosure, the need for adequate capital, and the importance of international supervisory coordination. i appreciate having the opportunity to meet with you today to discuss key supervisory issues. i look forward to our continuing joint supervisory efforts toward coordinated international bank supervision.