through which market discipline works are, of course, changes in access to funds and / or changes in risk premia as banks take on or shed risk or engage in certain types of transactions. the changing cost and availability of bank funding affect ex ante risk appetites of bank management and serve as market signals of a bank ’ s condition to market participants and to examiners. but the prerequisite to the enhancement of market discipline in conjunction with supervision and regulation is improvement in the amount and kind of public disclosure that uninsured claimants need about bank activities and on - and off - balance - sheet assets in order to make informed judgments and to act on those judgments. information on loans by risk category and information on residual risk retained in securitization are examples. the best way to encourage more disclosures is not yet clear. our intent is to consult with the industry regarding the establishment of new disclosure standards and ways to evaluate their application. supervision improved public disclosure will, we believe, not only enhance market discipline but also create further incentives for improvements in banks ’ risk - management practices and technologies. such improvements will enhance the supervisory pillar of prudential oversight. if supervisors are comfortable with a bank ’ s internal risk - management processes, the most cost - effective approach to prudential oversight would have supervisors tap into that bank ’ s internal risk assessments and other management information. to be sure, some “ transaction testing ” of risk - management systems by supervisors will necessarily remain. but as internal systems improve, the basic thrust of the examination process should shift from largely duplicating many activities already conducted within the bank to providing constructive feedback that the bank can use to enhance further the quality of its risk - management systems. it is these internal bank systems – coupled with public disclosure – that provide the first line of defense against undue risk - taking. indeed, it should be emphasized that the focus of supervision and regulation – especially for the larger institutions – should be even less on detail and more on the overall structure and operation of risk - management systems. that is the most efficient way to address our interest in both the safety and soundness of the banking system and the overall stability of financial markets. relying more extensively on banks ’ internal risk - management systems can also be used to enhance prudential assessments of a bank ’ s capital adequacy. as the basel consultative document suggests, over time our examination process for assessing bank capital adequacy would try to use the same techniques

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