" similarly, one of the best ways for supervisors to carry out the duty of prevention is by developing regulatory structures that encourage banks and their managers to govern themselves and control their risks. i believe that three important elements in a supervisory structure can help to create such incentives and thereby promote stability. the first consists of the relatively new " risk - focused " approach to bank supervision that is being adopted in financial centers around the world. it embodies a forward - looking perspective focusing most heavily on the risks that each individual bank faces. the second element is for supervisors to conduct independent reviews of a bank ’ s capital adequacy relative to its risk profile, while the third is to help improve the ability of market forces to exert discipline on management behavior. these last two elements, which i will address in more detail in a moment, have been adopted by the basel committee as key parts of our proposal to revise the international standards on capital regulation. risk - focused supervision in terms of the " risk - focused " approach to supervision, many of my colleagues would agree that what makes bank supervision so challenging is the need to keep pace with such a dynamic, fast - moving, and diverse industry. consequently, supervision must be adaptive. the banking industry is intensely competitive and firms must constantly identify new markets, new products, and new ways to do business. innovative products and technologies can quickly alter a bank ’ s exposure to risk. continuous innovation in the industry and increasingly rapid changes in risk profiles demand that supervisors, too, keep up with the latest developments and work to anticipate them to ensure that our regulatory framework remains relevant and timely. likewise, supervision needs to be flexible. we all know that the banking sector encompasses organizations that vary greatly in scope, size, and risk appetite, so it ’ s obvious that regulations that are useful for small, community mortgage banks will not apply equally well to massive, multinational trading banks, and vice versa. in the united states, the risk - focused approach that the federal reserve and other bank supervisors have adopted over the past five years allows us to tailor a supervisory plan appropriate for each bank. this marks a radical shift in the way that we evaluate a bank ’ s condition in the united states. rather than reviewing mainly the quality of individual loans and other items on a bank ’ s balance sheet, for example, our bank examiners now try to identify the most important risks to which each bank is exposed – and then determine whether bank management employs robust processes to control those

to promote stability, supervisors must first encourage banks to manage their risks appropriately to ensure proper safeguards are in place that limit an organization ’ s vulnerability. this is the duty of prevention. it is critical for supervisors to remember that the primary responsibility for the safe and sound operation of a banking organization rests with its board of directors and senior management. as a former commercial banker, i know that competent, capable leaders at the enterprise level, supported by a well - trained staff and a robust system of risk management processes and controls, make up the first line of defense against financial instability within an economy. as a supervisor, i believe that there should be sufficient market and supervisory incentives to encourage banks toward responsible behavior. • the supervisor ’ s second duty is to assist in the resolution of problems when they do occur, so that banks can continue to serve as intermediaries of credit, the lifeline of an economy, to businesses and consumers. this represents the duty of action. from the experience of the savings and loans crisis in the united states, to more recent regional financial emergencies elsewhere, we ’ ve seen that when disaster looms, prompt and decisive supervisory action is imperative to containing the damage that severely troubled financial institutions can wreak on the economy. in those extreme circumstances, supervisors must restore confidence quickly so that consumers and businesses do not lose access to credit necessary for the economy to grow. how the delicate balance of responsibilities of bank management and supervisors is accomplished, particularly in a period of stress, is crucial to the outcome of country ’ s economic performance. the philosophy of prevention : assist banks to govern themselves in developing regulations and practices that help to prevent financial crisis, supervisors must not lose sight of the inherent self - interest that banks have to retain the public ’ s confidence by maintaining safe and sound operations. no responsible firm seeks to fail, and no responsible bank would willingly engage in practices that would cause the market to doubt its long - term viability. consequently, our role as regulators is not to limit banks ’ opportunities for growth and profit. instead, it is to help banks to improve continuously their abilities to manage their businesses and their risks, thereby ensuring that, across the financial system, banks can maintain their financial health. at the same time, if we are to encourage responsible behavior, we must not create the illusion that we will rescue every institution that does not succeed. in this regard, you will recall goethe ’ s view : " what government is the best? that which teaches us to govern ourselves.