" not too big to fail " i mean that stockholders can lose all of their investment, that existing managers can lose their jobs, that uninsured creditors can suffer losses, and that the institution can either be reorganized or be wound down and possibly sold, in whole or in part, in an orderly way. given the size, complexity, and international scope of some of our banking institutions, this task is not easy. but at the federal reserve, developing such procedures has been a priority for some time. considerable evidence supports the view that market discipline is an important force for controlling bank risk - taking, especially at the largest institutions. this evidence suggests that reinforcing the effectiveness of market discipline would have considerable benefit, and thus i believe that such support should also be a priority. indeed, in my judgment, market discipline should be an important complement to supervisory discipline. efforts over the past couple of years by u. s. banking supervisors to augment market discipline have focused on better accounting practices and increased disclosure to improve the transparency of banking organizations. after all, markets function best when all participants are well informed. recently, as we all know, the issue of balance sheet transparency has become a very hot topic. in part for this reason, i will highlight one area of transparency in banking that i believe is of particular importance. as recent events have shown, companies can use special - purpose vehicles to obscure their true financial condition. such vehicles can serve as useful tools for structuring their legitimate business transactions. unfortunately, they can also be used to give the appearance that a company has shed risk that it has, in substance, retained. use of special - purpose vehicles to create such an appearance, coupled with financial - engineering techniques, is not in the spirit of the accounting rules. the accounting profession's rules require consolidation of certain special - purpose vehicles when an independent third party has not assumed the substantive risks of ownership of the underlying assets. though there does not appear to be a systematic problem with inaccurate treatment by bank holding companies of sales of loans to off - balance - sheet special - purpose entities, in certain instances companies have not given appropriate consideration to this accounting requirement. the banking agencies have long recognized that exposures to risk can include interests in specialpurpose vehicles and other entities that a banking organization does not consolidate. as a result, as part of our ongoing examination activities, supervisors have endeavored to take such exposures into account in assessing the condition of an institution. furthermore, in appropriate

circumstances, when we find that a banking organization has effectively retained the substantive risks of assets it has transferred to a special - purpose vehicle, we will require consolidation of those assets in publicly available regulatory financial statements prepared in accordance with generally accepted accounting principles. these statements are required at a minimum to meet generally accepted accounting principles. but the federal reserve reserves the right to apply its own sound interpretation of those accounting principles based on a careful consideration of the underlying facts and circumstances and the economic substance of the transactions. we have exercised this right and will continue to do so when necessary to ensure the transparency of an institution's risk profile and financial condition through the accuracy of its public financial statements. in related efforts, bank supervisors have in recent years increased their use of market information in supervisory surveillance of large and complex banking organizations. for example, for some time the fed staff has been providing reports to examiners on the interest - rate spreads the market requires on the subordinated debt of large banking organizations. examiners are also given estimates of expected default frequencies derived from the organizations'stock price data. because such information can be difficult to interpret, the reports given to examiners provide guidance designed to assist in understanding whether changes in an institution's debt spread or probability of default are significant. looking forward, the board has instructed its supervisory and research staffs to devote substantial efforts to improving their ability to use market information in surveillance activities. the maintenance of open and competitive markets should also be an important goal of public policy. such markets are a prerequisite to maximizing both the quality and the quantity and minimizing the cost of products and services consumed by households, businesses, and government. this is no less true in banking than in any other line of business. to that end, the board helps enforce antitrust policy in the united states. and, just as with bank safety and soundness policy, antitrust policy, to be successful, must evolve with technological and market realities. changes in the way firms deliver financial services to their customers and in the nature of the relationships among providers of various financial services may require some adjustments in the implementation of antitrust policy. for example, as the number of large, geographically diverse banking organizations increases, the nature of competition among banks within a local geographic market may change. likewise, if financial institutions continue to expand the scope of products offered within a single organization, the influence of nonbank competitors on prices of services provided by banking organizations may increase. in addition, technological change may someday