on banking supervision, the federal reserve and other us and foreign bank supervisory agencies are working actively to design a more accurate, risk sensitive capital standard for credit risk than the one we have now. full credit risk modeling seems currently beyond our reach, since industry practices have not sufficiently evolved. the basel committee expects, though, next year to propose an approach built on internal credit risk ratings of banks. such a new standard would be a major step for bank supervision and regulation and will also have major implications for banks around the world. it is also a necessary step, we believe, if we are to keep pace with market practices and address developments that undermine current standards. let me emphasize that the new credit risk approaches being contemplated will be applicable only to the larger, more sophisticated and complicated organizations. the vast majority of banks need not have their capital requirements modified in significant ways as we move away from a one - size - fits - all structure. in order to spur industry efforts in measuring risk, the federal reserve this past summer issued a new supervisory policy directing examiners to review the internal credit risk rating systems of large banks. that statement emphasized the need for banking organizations to ensure their capital was not only adequate in meeting regulatory standards, but also that it was sufficient to support all underlying risks. we issued the guidance recognizing the need to make clear progress in developing new capital standards and also with the view that the industry has important steps to take. our earlier discussions with major institutions about their own processes for judging their capital adequacy supported that view. too often they rely on the regulatory measure, itself, and on those calculations for their peers. the role of internal measures of economic risks in evaluating the level of firm - wide capital seemed generally weak and unclear. the need for a stronger connection between economic risks and capital is particularly great at institutions actively involved in complex securitizations and in other complex transfers of risk. we do not expect immediate results for most organizations, but we want to see clear and steady progress made by them. the other “ pillars ” regulatory capital standards are important, but they are only part of a complete oversight process. to that point, the basel committee is building its approach on three so - called pillars : capital standards, supervision, and market discipline. each pillar is important and connected with one another. given the pace of transactions and the complexity of banking products, the federal reserve and other authorities need to rely increasingly on internal risk measures, information systems, and internal controls of banks.

as i mentioned above, strong, more risk - sensitive capital requirements built on a bank ’ s internal model must also be reviewed periodically for their rigor and effectiveness. with the varying and somewhat subjective nature of internal measures, the matter of consistency among banks becomes important, both to banks and their supervisors. additional public disclosures by banks and market discipline can help in that respect. bank supervision. in supervising banks, us regulators have recognized the need for an ongoing, more risk - focused approach, particularly for large, complex and internationally active banks. we constantly need to stay abreast of the nature of their activities and of their management and control processes. for these institutions, point - in - time examinations no longer suffice, and they have not sufficed for some time. we need assurance that these institutions will handle routine and non - routine transactions properly long after examiners leave the bank. we also need to tailor our on - site reviews to the circumstances and activities at each institution, so that our time is well spent understanding the bank ’ s management process and identifying weaknesses in key systems and controls. nevertheless, the process still entails a certain amount of transaction testing. to accommodate this process, the federal reserve has established a separate supervisory program for large, complex banking organizations, or lcbos. we believe these institutions require more specialized, ongoing oversight because of the size and dynamic nature of their activities. the program is more, though, than simply enhanced supervision of individual institutions. it involves a broader understanding of the potential systemic risk represented by this group of institutions. currently, there are about 30 institutions in the group, although the figure can change. they are typically both major competitors and counterparties of one another and, combined, account for a substantial share of the systemic risk inherent in the us banking system. management of this process revolves around a supervisory officer, designated as a “ central point of contact ”, and a team of experienced staff members with skills suited to the business activities and risk profile of each institution. in large part, they will focus on internal management information systems and procedures for identifying and controlling risk. they will need to understand the risk management process as each institution implements it - by major business line, by type of risk, and so forth - in reaching overall judgments about corporate - wide risks. we believe this approach will best help supervisors keep abreast of risks and events and that it will also help us identify and strengthen weak areas within banks. the principal risk in banking relates