hazard and the subsidy implicit in the federal safety net. i have spent a good deal of time of late on the fourth objective. therefore, today i will concentrate on the first three and how, in particular, financial reform must be careful to preserve the role of the state - chartered bank in meeting our economy ’ s macroeconomic objectives and our concerns regarding systemic risk. the importance of the state - chartered bank some erroneously dismiss state - chartered banks as representing only the down - scale end of the banking market and, therefore, being not particularly worthy of careful policy consideration. state - chartered banks indeed are smaller on average than national banks, and are disproportionately represented within the very smallest size class. nevertheless, state - chartered banks account for about a third of our superregionals, not to mention a few state banks that are among the very largest money center institutions. even the preponderance of small, state - chartered banks, however, play a critical role within our financial system, for several reasons. first, having large numbers of community - sized banks, be they state - chartered or national banks, is a major contribution to the stability of the banking system and the well - being of the macroeconomy. just as a more highly diversified loan portfolio reduces risk to the individual bank, a more highly diversified banking structure reduces risk to the banking system as a whole. indeed, our decentralized and diverse banking structure was arguably the key to weathering the financial crisis of the late 1980s. during those dark days, our system was able to absorb more than a thousand u. s. bank failures. and yet here we are, less than a decade later, with loan loss reserves and bank capital at their highest levels in almost a half century, and the insurance fund restored to its maximum coverage ratio - - all without cost to the taxpayer. of course, the bank failures of the past decade, combined with the current wave of mergers and acquisitions, have served to reduce significantly the total number of banking organizations in the u. s. but the more than 7, 000 separate banking companies that remain are more than sufficient to maintain our highly decentralized and flexible banking structure. large numbers of small banks go hand in hand with a macroeconomy characterized by large numbers of small, entrepreneurial nonfinancial businesses. smaller banks traditionally have been a major source of capital for small businesses that may not have access to securities markets. in turn, small businesses account for the

banks on an equal footing with national banks with regard to permissible activities of branches in a host state. systemic risk and the role of the federal reserve by now, we are all acutely aware that the process of “ financial reform ” is a complex one, with intended and unintended consequences flowing from almost every act of the legislator or regulator. i have focused today on only two aspects of the debate over financial reform, albeit two very important aspects - - the need to maintain our uniquely decentralized banking system, with its reliance on large numbers of relatively small institutions, and the desirability of retaining the dual banking system, with its implicit choice of regulator. let me conclude by turning to another important facet of the debate over financial reform - - the role of the federal reserve in containing systemic risk. it is critical that we guard against diminution of this role as yet another unintended consequence of financial reform. the risk of systemwide disruptions, for better or for worse, is importantly determined by the actions or inactions of our largest, most complex banking organizations. the architects of financial reform, therefore, must necessarily consider how best to supervise risk - taking at these large organizations and, in particular, whether there should be significant umbrella or consolidated supervision of the banking company. in the past, holding company supervision was concentrated at the bank level, not only because the bank tended to constitute the bulk of risk - taking activities but also because the holding company tended to manage the bank separately from the various nonbank activities of the organization. more recently, however, the focus of supervision of holding companies by the federal reserve has been modified to reflect changes in management procedures - - holding companies now tend to manage risk on a consolidated basis across all their bank and nonbank subsidiaries. risk and profitability measurements, including, for example, risk - adjusted return on capital calculations, most often are made by business line rather than on a subsidiary basis. as banks engage in new or expanded nonbanking activity in the wake of financial reform, it is likely that these activities too would be managed on a consolidated basis. for this reason, and because supervisors recognize that scarce examination resources are often most effectively employed by focusing on risk management processes, our determination of an institution ’ s safety and soundness increasingly will be based on an analysis of the decisionmaking and internal control processes for the total organization. such umbrella supervision need not be in any significant way “ intrusive ”, nor should financial firms be