. the application should not become a vehicle for comprehensively evaluating and addressing supervisory and compliance issues at the applicant organization. this principle is also the basis for recent congressional action to eliminate the prior approval requirement for engaging in board - approved nonbanking activities under section 4 of the bank holding company act, provided the company meets specified standards for capital and management at the time of its last examination. as a result, the board has significantly streamlined the process for well - capitalized, well - run companies to acquire a bank or nonbank and eliminated the prior approval process for such companies to engage de novo in board - approved nonbanking activities. second, the board concluded that bank holding companies should be permitted to conduct nonbanking activities to the fullest extent permissible under the bank holding company act, and that regulation y should be sufficiently flexible to allow for industry changes in permissible activities without requiring additional regulatory filings. accordingly, the board removed restrictions on investment advisory activities, derivatives trading activities, leasing, and other activities whenever those restrictions impeded efficiency or imposed costs without conferring corresponding benefits to safety and soundness. the board also permitted a data processing or management consulting subsidiary to derive up to 30 percent of its revenue from nonfinancial data processing or nonfinancial management consulting. and the board has indicated that it will be pro - active in approving new activities. the next area where the board has been particularly active concerns firewalls between a bank and an affiliated securities firm, better known as a section 20 affiliate. experience with these section 20 affiliates, and other affiliates engaging in similar activities without such restrictions, led the board to conduct a comprehensive review of the firewalls. much of the potential for conflicts of interest between a bank and a securities firm is addressed by other laws such as the registration and disclosure requirements and the anti - fraud provisions of the securities laws. legislative and regulatory enactments, many adopted since the board ’ s initial 1987 section 20 order, also provide important insulation between a bank and a section 20 affiliate by imposing qualitative and quantitative limits on inter - affiliate transactions and requiring that a customer receive disclosures detailing the identity of its counterparty and the product being purchased. accordingly, the board has repealed its restriction on cross - marketing between a bank and a section 20 affiliate, eliminated a blanket restriction on employee interlocks, and scaled back a blanket restriction on officer interlocks to include only a chief executive officer. the board has also proposed to eliminate

the potential impact of consolidated risk management policies and internal controls on the operations of the insured depository institution. to implement this approach, the federal reserve last year began assigning a formal rating to risk management in our holding company and bank examination reports. changes have come not just in what we examine, but also in how we examine. we are making greater use of internal risk management reports, the results of internal risk models, and the work of internal and external auditors. for example, the federal reserve is now collecting internal loan classification reports prepared by most of our larger banks, as well as other information generated by their internal risk management systems. this approach has a further advantage in that it can generally be conducted off - site, at less burden to the firm. our examinations are also becoming more efficient through pre - visitation planning that better identifies those areas of a company ’ s activities that pose the greatest risk. we are also making greater use of computer technology in the examination process and using automated systems that permit examiners to analyze data on their personal computers. and, of course, whenever possible we rely upon examination and inspection reports prepared by regulators of the individual entities within the bank holding company. like examinations, disclosure practices of the past also focused narrowly on the financial condition of an institution at a point in time, using conventional accounting and regulatory measures. today, however, disclosures are expanding to reveal not only the current risks of the balance sheet, but also management ’ s philosophy for managing and controlling risk. disclosure is an important aid to us as supervisors and, we hope, to market analysts. improved disclosure has already been put into practice for derivatives and market risks, and we will continue to urge better and more broadly based disclosure of all major activities and exposures. the effect of supervisory changes on legislation as the issue of consolidated or “ umbrella ” supervision is debated in the legislative process, i believe it is important to examine how these supervisory developments alter that debate. there are those who argue that umbrella supervision of a diverse financial services holding company would either be an impossible task or an intolerable burden. but the risk - analysis and surveillance techniques that we have decided are the most effective for bank holding companies should also be adaptable to more diverse financial organizations that include banking operations. clearly, we must all give additional thought to how such an adaptation would work so that we minimize the intrusion into new activities. perhaps there should be some kind of carve - out for firms whose banking operations are a small part