history of the 1990s, which includes episodes of global financial instability spreading from small countries through international capital markets and banks, underscores the need to maintain adequate capital in the internationally active banks. for the sake of maintaining global financial stability, i hope that everyone values that goal. basel ii would also improve risk disclosure by many banks worldwide. the proposal recommends specific disclosures to better convey an institution's capital adequacy and risk profile. the incentives in basel ii should greatly diminish the opacity that cloaks many international financial institutions and help bring about a convergence of international norms on banking disclosure. i believe that counterparties will expect, indeed force, greater disclosure. recent history certainly teaches us that understanding what drives a counterparty's financial performance and its risk appetite is necessary for accurately pricing any transaction or even for deciding whether to engage in a transaction. conclusion sound accounting, auditing, and disclosure concepts, consistently applied, have long been at the heart of efficient markets. accounting and auditing standards setters should continue their efforts to make more meaningful information available in financial statements and other reports. at the same time, the more complex nature of organizations - - and constantly changing services, customers, and business conditions - - imply that market participants need additional types of information to make appropriate investment decisions. leading firms have been developing comprehensive risk management processes for internal decisionmaking that can provide the framework for more meaningful risk disclosures. regulators and market participants should encourage financial firms to develop these new approaches and, in these early stages, give them the flexibility to choose the most appropriate format for risk disclosure. taken together, these measures should improve the transparency of complex firms ; in doing so, they will enhance the quality of information available for effective market discipline and banking supervision in ways that strengthen the financial system of the twenty - first century.

susan schmidt bies : strengthening the financial system of the 21st century through sound accounting and disclosure remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the symposium on building the financial system of the 21st century : an agenda for europe and the united states, ra¼schlikon, switzerland, 28 february 2002. * * * i appreciate the opportunity to participate in a symposium that is exploring ways to improve the financial systems of europe and the united states. the unfolding concerns in recent months about the quality of the accounting, auditing, and disclosure practices of major nonfinancial and financial companies give added importance to our discussions here. as banking supervisors, we have increasingly recognized the importance of sound accounting and disclosure in our risk - focused examination policies, capital adequacy approaches, and risk - management practices to address the growing complexity of banking organizations. as organizations grow in size and scope, outside investors have more difficulty understanding a particular firm's unique combination of risks and business line earnings. modern risk - management tools can describe risk in ways that traditional accounting standards for recognition and measurement cannot. thus, disclosure of firms'risk - management positions and risk management strategies - - not necessarily another accounting schedule - - is becoming a key component of improving market transparency. tonight, i would like to address the role of disclosure in describing the risk exposures of financial organizations. evolution of risk management the last decades of the twentieth century were, without doubt, periods of dramatic change in financial engineering, financial innovation, and risk management practices. traditionally, net interest income has been the primary source of income to bankers. deposit interest rates in the united states were fixed by regulators until the 1970s and rarely changed, so that fixed - rate, term loans did not create significant income volatility. by the end of the 1970s, however, bankers in the united states were faced simultaneously with deregulation of interest rates on deposits and rising interest rates due to the prevailing high inflation. in 1980, price and credit controls that were enacted to curb inflation further increased market volatility. bankers found themselves paying higher rates on outstanding six - month certificates of deposit than they received as interest on prime - rate loans when money market interest rates fell 800 basis points from march to june. as a result, at the beginning of the 1980s, asset / liability models were developed at banks to help manage the effects of the variability of interest income and expense. banks began to match the rep