and detailed regulation, which would dramatically reduce flexibility and innovation in our banking system. we have, i believe, already started down the path i have described. several problems remain to be solved. any one of them could slow or even stop our progress. i have already mentioned the need to develop procedures for validating risk classifications and for converting risk classifications into risk weights on an equitable basis across banks. the challenge of reaching a consensus at basel is another obstacle. but whatever we develop, either here or on an international basis, we will be relying on the good judgment and sophistication of the nation ’ s examiners and on their development of the skills needed to keep pace with the activities of banks operating in the united states. cooperation but skill and good judgment are, unfortunately, not sufficient. for better or worse, supervisors and policymakers function in a multi - agency environment. we must cooperate across agencies if we are going to get the job done. most global us banks are supervised by the office of the comptroller of the currency. all bank and financial holding companies and some large banks are supervised by the federal reserve. nothing in this structure was changed by the recently enacted gramm - leach - bliley act. the challenges of supervising large, complex banking organizations raise yet again the question of how to make the supervisory structure mandated by the congress work efficiently and in the public interest. all the parties, it seems to me, must work out relationships and operating norms that serve the objective of safe, sound, and efficient financial markets. the implicit tensions among the regulators are a fact of life ; goodwill and cooperation are required if we are to carry out the law. before i proceed further, it might help if i spend a moment on the philosophy underlying umbrella supervision and distinguish this supervisory approach from direct supervision of insured depository institutions. as you know, all large and sophisticated financial services companies manage their risks on a consolidated basis, requiring, in turn, oversight of risk - taking by the consolidated entity. the consolidated, or umbrella, supervisor aims to keep the relevant regulators informed about overall risk - taking and to identify and evaluate the myriad risks that extend throughout such diversified bank and financial holding companies in order to judge how the parts and the whole affect, or may affect, affiliated banks. to fulfill its responsibility, reaffirmed by the recent legislation, the federal reserve plans to focus on the organization ’ s consolidated risk - management process and on overall capital adequacy. for the

to protect insured depository institutions from the risks of activities conducted by bank holding company affiliates. the law limits the extension of credit by insured depository institutions to their affiliates, and the umbrella supervisor - the fed - is charged with limiting other forms of risk exposure to the depository institutions from the bank holding company structure. clearly, there is a tension between protecting banks from such risks and avoiding the extension of bank - like supervision to affiliates. the provisions of the law dealing with the relationship between the federal reserve and the functional supervisors of certain types of nonbank affiliates - the sec, the commodity futures trading commission, and the state insurance regulators - attempt to balance these considerations. as you know, these provisions call for the federal reserve to rely, as much as possible, on the examinations conducted by the functional supervisors and on public reports to obtain information about broker - dealers, insurance companies, and futures merchants. the federal reserve may examine such functionally regulated entities only if ( 1 ) the board has reasonable cause to believe that the entity is engaged in activities that pose a material risk to an affiliated depository institution, ( 2 ) the board determines that an examination is necessary to inform the board of the entity ’ s risk - management systems, or ( 3 ) the board has reasonable cause to believe that the entity is not in compliance with the banking laws. we are in the process of working out satisfactory procedures with functional regulators. but it seems to me that we also must work harder to cooperate and share information among the umbrella and bank supervisors in a manner that is satisfactory to both and that minimizes regulatory burden and overlap. in principle, the relationship between the umbrella supervisor and the primary federal bank regulator could involve the relationship between the federal reserve and either the federal deposit insurance corporation or the occ. in practice, however, the key relationship for large, complex financial holding companies will be between the federal reserve and the occ because the banks in large, complex financial holding companies are either state member banks or national banks. indeed, most of the large and complex institutions likely to take advantage of the new opportunities have lead banks, as i have noted, with national charters. this relationship between the primary bank regulator and the umbrella supervisor must respect the agencies ’ individual statutory authorities and responsibilities. at the same time, the primary bank regulator and the umbrella supervisor need to share information that allows them to carry out their responsibilities without creating duplication or excessive burden. given the systemic risk associated with the disruption of the operations of large