discount - window and lender - of - last - resort activities. these activities involve the provision of short - term, fully collateralized loans to the financial system as a means of meeting temporary liquidity needs, reducing market dysfunctions, or calming financial panics. as has been demonstrated during financial panics for literally hundreds of years, the ability of central banks to independently undertake such lending allows for a more rapid and effective response in a crisis. on the other hand, as fiscal decisions are the province of the executive and the legislature, the case for independent lender - of - last - resort authority is strongest when the associated fiscal risks are minimal. requiring that central bank lending be fully secured, as is the case in the united states, helps to limit its fiscal implications. looking forward, the federal reserve supports measures that help further clarify the dividing line between monetary and fiscal responsibilities. notably, the development of a new statutory framework for the resolution of failing, systemically important firms is not only highly desirable as a means of reducing systemic risk, but it will also be useful in establishing the appropriate roles of the federal reserve and other agencies in such resolutions. the issue of the fiscal - monetary distinction may also arise in the case of the nonconventional policy known as quantitative easing, in which the central bank provides additional support for the economy and the financial system by expanding the monetary base, for example, through the purchase of long - term securities. rarely employed outside of japan before the crisis, central banks in a number of advanced economies have undertaken variants of quantitative easing in recent years as conventional policies have reached their limits. in the rogoff ( 1985 ) suggested the appointment of a central banker predisposed toward keeping inflation low and stable as a solution to the time - inconsistency problem ; additional discussions are presented in persson and tabellini ( 1993 ) and walsh ( 2003, chapter 8 ). alesina and gatti ( 1995 ) and waller and walsh ( 1996 ) address how establishing an independent, nonpartisan central bank can help insulate monetary policy from political pressures. united states, the federal reserve has purchased both treasury securities and securities guaranteed by government - sponsored enterprises. although quantitative easing, like conventional monetary policy, works by affecting broad financial conditions, it can have fiscal side effects : increased income, or seigniorage, for the government when longer - term securities are purchased, and possible capital gains or losses when securities are sold. nevertheless, i think there is a

focused supervision programs. these reports contribute to pre - examination planning, facilitate off - site monitoring programs, and ultimately help in determining the institution's financial condition. a strong external audit program assists us in moving away from detailed, burdensome, and what some consider invasive examinations. supervised institutions might well decide to use the expertise of the external auditor for more than routine financial reports. external auditors could also review the quality of internal controls and systems and assess the internal audit function's scope and adequacy. we are all well aware that a strong system of internal control is the foundation for the safe and sound operation of the financial organization. furthermore, a financial institution's board of directors is responsible for setting the control environment, and senior managers are responsible for laying down the internal control process. recognizing that responsibility, i would not be surprised if boards of directors and senior managers are asking their external auditors to review the internal audit function and recommend improvements in light of the changed business environment post - september 11. external auditors should be prepared to answer such questions from directors as the following : • is the internal audit function appropriate for the size of our institution and the nature and scope of our business, and are we receiving unbiased assessments? • is our internal audit function competent given the current environment? • are the resources available to our internal audit function adequate given the nature, complexity, and risk of our institutions'activities? • are weaknesses being fully identified and reported promptly to us? external auditors can also help federal regulators by encouraging financial institutions to frequently reassess and refine their risk - management practices. a risk - management system should continually monitor financial risks in a changing business climate, such as the outlook for credit risk, market risk, liquidity risk, and operational risk. of course, the potential benefits of external audits can be realized only when audits are performed according to high professional standards. this is not a time when the accounting profession can be complacent. each firm should review its own internal practices to ensure that audits are of the best quality, consistent with sound practices and high standards of ethics and independence. the peer - review process should be viewed as an opportunity to improve quality rather than a somewhat routine compliance obligation. i certainly encourage the auditing profession to police itself and to strive continually to improve audit quality. by doing so you avoid suspicions regarding the competence and judgment of independent auditors. also keep foremost in mind that your ultimate client is not