##mediation for a given level of risk. alternatively, constraints on supervisory authorities or practices could shift the frontier in the opposite direction if use of effective tools is prohibited. given the complexity of these relationships, it is not surprising that there is a wide range of estimates and theories about the optimal type and level of oversight of financial institutions. nonetheless, we need to understand better these relationships in order to make policy choices more effective. this is an area where i believe the official sector, industry participants, and researchers can all continue to make progress. social and private perspective a second interesting issue reflects the perspective on risk and return. in traditional portfolio investment problems, it is clearly the risk and return to the private investor. when thinking about policy, however, the appropriate perspective of the official sector is for society as a whole, which likely differs from the perspective of an individual firm. that is, the official sector and private sector might measure the axes differently — particularly the risk axis — because the official sector cares about spillovers, externalities, and other market failures that private actors may ignore. 11 this broader perspective is a critical part of the supervisory framework for large banks that was implemented after the financial crisis. in particular, the official sector recognizes the potential impact that stress at a large bank could have on financial markets or the real economy. as a result, the federal reserve supervisory program pursues two complementary goals for large bank supervision — one, to enhance resilience to lower the probability of failure or inability to provide intermediation services and, two, to reduce the impact on the financial system or economy in the event failure or material weakness does in fact occur. 12 this difference in perspective potentially introduces some divergence in views and assessment of what an efficient policy looks like. a set of policies might be socially efficient — that is, on the frontier when risk and return are measured for society as a whole – but perceived as inefficient by the industry or the public, who may focus on the private impact on individual firms or sectors. this can lead to some debate about the stated goals and assessment of the efficacy of a particular policy mix. i believe this is an area where better communication can help and the official sector can be clear on expected outcomes and explain any divergence between social and private perspectives. distinguishing policy changes 4 / 7 bis central bankers'speeches a third issue is that it is not always easy to distinguish policy changes that move outcomes along the frontier from policy changes that move outcomes toward the frontier

as yahoo! and america online to offer services to internet users. it is still far too early to determine just how, or to what extent, the internet will change the financial services sector. for instance, it is important to note that, with few exceptions, most banks view the internet as an important supplementary distribution channel and not as a replacement for branches that give you a physical presence in the communities you serve. moreover, the true value of cross - selling remains uncertain, and the ability to collect and use personal data will have to be balanced against the demand for more protection of consumer privacy. on the commercial side, the largest institutions are actively pursuing the emerging “ business - to - business ” e - commerce markets, but the experience there is still too fresh to offer much insight into how those markets will evolve. as we struggle with our own assessment of the impact this remarkable technology is having on the industry, supervisors must take care that our efforts to ensure the safe and sound operation of the financial markets do not stifle innovation and vitality the internet is injecting into our economy. to that end, we are developing examination methodologies and supervisory guidelines for banks with internet operations, and, with our colleagues in other jurisdictions, are assessing cross - border issues raised by e - banking. of course, the other great source of new opportunity for banks and other financial institutions is the gramm - leach - bliley financial modernization act, which president clinton signed into law last november. as you know, the act repeals those provisions of the glass - steagall act of 1933 and the bank holding company act of 1956 that restrict the ability of bank holding companies to affiliate with securities firms and insurance companies. the act authorizes bank holding companies that are well - managed and well - capitalized to become “ financial holding companies ” ( fhcs ) and to engage in a diversified range of financially related activities, including commercial banking, securities dealing and underwriting, and insurance agency and underwriting activities. passage of the act is of truly historic significance, effecting reform that we at the federal reserve, and many of you, have supported for years. together with the repeal of inter - state branching restrictions, the act provides long - overdue modernization of our banking laws, making them more consistent with marketplace realities and the needs of today ’ s financial services customer. management will now enjoy greatly enhanced freedom and flexibility in determining how to best deliver products and services to the marketplace, and the market will judge