will be very difficult to reverse. finally, the holding company framework of the bills would keep the federal reserve as the umbrella supervisor. i believe that the fed has an important role to play in banking supervision in order to carry out its responsibilities for monetary policy, economic stabilization, and crisis management. i cannot grasp how we could possibly understand what is happening in banking markets, what innovations are occurring and their implications, and the nature and quality of the risk exposures and controls so critical for crisis management and policy formulation without the hands - on practical exposure that comes from supervision. an umbrella supervisor is needed for complex organizations in order to assure that the entire organization and its policies and controls are well managed and consistent with financial stability. at least for the large organizations, i believe that supervisor should be the federal reserve so that we can play our role as a central bank and international crisis manager. conclusion the rapid changes in banking and financial services markets are creating opportunities and challenges. increased competition in the financial services industry and increased synergies provided by financial services firms promise important benefits to consumers. but the increased size, breadth, complexity, and geographic scope of banking have increased the challenge of managing and of regulating and supervising banks. banks have responded by developing new approaches to measuring and managing risk. now it is time for regulatory standards and supervisory practice to catch up. this catching up must involve updating the legislative framework underlying banking. it must also involve updating the international capital standards that have been the foundation of the regulatory framework. and it may also be useful to reinforce the role of market discipline. working together, the markets, the political process, and the regulators can ensure that we take advantage of the new opportunities while maintaining the safety and soundness of our banking system.

, which by their nature require minimal funding and create minimal risk. these limitations, it seems to me, are crucial for several reasons. banks have a lower cost of funds than other financial entities because of the safety net. as i discussed earlier, this federal safety net, and the subsidy that goes along with it, are provided by the government in order to buy systemic stability. but it has a cost : increased risk taking by banks, reduced market discipline, and consequently the need for more onerous bank supervision in order to balance the resultant moral hazard. the last thing we should want is to extend that subsidy over a wider range of activities, which is, i believe, exactly what would happen if bank op subs could engage in wider nonbank financial activities. not only would that increase the moral hazard - - and the need for bank - like supervision - - but it would also unbalance the competitive playing field between bank subs and independent firms engaging in the same business, a strange result for legislation whose ultimate purpose is to increase the competition for financial services. both bills would require that organizations that conduct both banking and other financial businesses organize in a holding company form where the bank and the other activities are both subs of the holding company. profits and losses of the business lines accrue to the holding company and thus do not directly benefit nor endanger the bank, the safety net, or the taxpayer. the safety net subsidy is not directly available to the holding company affiliates and competition is thus more balanced. moreover, traditional regulators like the sec and the state insurance commissioners still regulate the entities engaged in nonbank activities as if they were independent firms. functional regulation is desirable not only for competitive equity, but is a political necessity and a practical reality in the process of balancing that is required to pass financial modernization. in principle, functional regulation could also be applied to op subs, but the safety net, i submit, would soon create regulatory conflict with that structure. importantly, both bills would prohibit commercial affiliations with banks. there is no doubt that it is becoming increasingly difficult to draw a bright line that separates financial services from nonfinancial businesses ; it will only become more difficult to do so. but, the truth is that we are not sure enough of the implications of combining banking and commerce - potential conflicts of interest, concentration of power, and safety net and stability concerns - - to move forward in this area. better, i think, to digest financial reform before moving in an area that