these foreign banking organizations were not previously subject to the same level of oversight as our domestic organizations. recognizing the seriousness of these weaknesses and their potential for causing problems in the future, the federal reserve has taken a number of steps to ensure that practices are materially upgraded at foreign branches and that any weaknesses continue to be uncovered. in addition to identifying and addressing internal control and audit weaknesses through examinations and supervisory follow - up, these efforts include ensuring that the foreign bank provides the necessary managerial support to its u. s. branches, including adequate systems of controls and audit. to place even more emphasis on internal controls and audit systems, the foreign branch rating system was revised in 1994. furthermore, in 1996 additional steps were taken to ensure that internal control weaknesses are corrected and will not cause financial harm by adopting requirements for audit procedures in situations where significant control weaknesses are detected. these efforts to detect problems at their early stages and resolve them appear to be having positive effects. after peaking in 1993, there has been a steady decline in the number of u. s. branches and agencies with an overall examination rating of fair or lower and a rating of fair or lower in an examination component substantively affected by internal control and audit weaknesses. we believe that our continued efforts in this area will lead to further improvements in the internal control and audit practices of foreign banking organizations implementing the risk - focused approach has not been an easy task. it has required a significant revision of our broad and specialized training programs, including expansion of capital markets, information technology, and global trading activities, as well as courses devoted exclusively to internal controls. these education programs will, of course, need to be continually updated as industry activities and conditions evolve. with the greater discretion provided to examiners to focus on areas of highest risk, ensuring the consistency and quality of examinations has increased in importance. fortunately, new training courses and improved examination platforms, tools, and programs that guide examiners through the appropriate selection of examination procedures will help. in addition, our ability to evaluate more thoroughly the quality of an examination has improved with the greater depth of analysis provided in supporting examination materials such as the written risk assessments and analysis of exam findings. those materials are allowing us to perform comparative reviews of examinations across institutions of similar size, risk profile and complexity, to ensure quality and consistency. so far we have been able to evaluate the effectiveness of our examination programs by identifying whether problems are identified early and resolved in a timely fashion, by evaluating whether examination reports and findings provide clear feedback to

to identify and resolve problems. as a result, the federal reserve is placing greater reliance than before on a bank ’ s internal auditors and on the accuracy and adequacy of its information systems. the review of the information flow extends from top to bottom, and with the expectation that bank senior management and boards of directors are actively involved in monitoring the bank ’ s activities and providing sufficient guidance regarding risk assumption. 1 “ independent commercial banking organizations ” is defined as the sum of all bank holding companies and independent banks. multi - bank holding companies are, therefore, considered as a single organization. as in the past, performance of substantive checks on the reliability of a bank ’ s controls remains today a cornerstone of the examination process, albeit in a more automated and advanced form. for example, automated loan sampling is performed for the purpose of generating statistically valid conclusions about the accuracy of a bank ’ s internal loan review process. to the extent we can validate the integrity of a bank ’ s internal controls more efficiently, we can place more confidence in them at an earlier stage and can also take greater comfort that management is getting an accurate indication of the bank ’ s condition. toward that end, board staff is working to refine loan - sampling procedures that should further boost examiner productivity and accomplish other supervisory goals. moreover, as examiners are able to complete loan reviews more quickly, they will have more time to review other high - priority aspects of the institution ’ s operations. a significant benefit of the risk - focused approach is its emphasis on ensuring that the bank ’ s internal oversight processes are sound and that communication between the bank and senior examiners is ongoing between examinations. that approach is generally supported by institutions we supervise and provides a more comprehensive oversight process that complements our annual or 18 - month examinations. such an approach strengthens our ability to respond promptly if conditions deteriorate. another benefit of the risk - focused approach has been a greater amount of planning, analysis, and information gathering at reserve banks prior to the on - site portion of the examination. far from reducing our hands - on knowledge of the institution, this approach has ensured that when we are on - site, we are reviewing and analyzing the right areas, talking to the right people and making better use of our time and that of the bank ’ s management and employees. in addition to improving productivity, it has also reduced our travel costs and improved employee morale. examination staff at the reserve banks indicate that this process may be reducing on