ms. phillips discusses recent developments in supervision and regulation and how they affect the debate on financial modernization remarks by ms. susan m. phillips, a member of the board of governors of the us federal reserve system, at the annual washington conference of the institute of international bankers on 3 / 3 / 97. i am pleased to have the opportunity to address this group at a time when developments in global financial markets are presenting particular challenges for market participants and market regulators alike. i was asked to talk with you today about both developments in federal reserve supervision and regulation, as well as the approaches to financial modernization being debated in the congress. i won ’ t try to cover the full waterfront on these topics, but would like to share with you some of the board ’ s considerable rethinking about the way we supervise and regulate bank holding companies. i will also describe how i believe the recent board initiatives coming out of this process may well alter the debate about the structure and supervision of financial services in the united states - - a topic i believe has received insufficient attention in the legislative debate so far. i will focus my discussion of recent board actions on the supervisory process and on three regulatory changes made or proposed by the board : changes to the application and nonbanking provisions of regulation y, changes and proposed changes to the board - imposed “ firewalls ” between a bank and a securities affiliate, and changes to the board ’ s anti - tying rules. i stress these three not necessarily because they are the most important undertaken by the board, but because i believe that they most directly affect the debate about how financial services should be supervised. supervisory changes the cornerstone of the bank supervisory process is the verification of prudent practices and financial condition through on - site examinations, coupled with off - site surveillance. traditionally, on - site examinations of bank holding companies and their nonbank subsidiaries have focused on verifying compliance and determining the financial condition of an institution at the time of the examination by reviewing their loans and by testing other transactions. this process is changing. the federal reserve ’ s supervisory oversight at the bank holding company level is increasingly directed at evaluating risk management, internal controls, and decision making processes that are shared between a bank and its parent, rather than focusing on transactions and positions at nonbank affiliates. this focus is necessary given the continuing trend toward integrated management of financial activities on a consolidated basis. testing the adequacy of risk management and internal control helps us understand the financial condition of the consolidated organization and

irish non - bank financial sector figure 1 shows the sectoral composition of the irish non - bank financial sector. in addition to significant insurance and pension fund sectors, ireland hosts entities ( mainly investment funds and securitisation vehicles ) that support a large amount of non - bank financial intermediation ( moloney and murphy 2013 ). bis central bankers ’ speeches figure 2 shows that irish - resident entities account for a sizeable proportion of funds activity in the euro area, such that ireland plays an important role as an international financial centre for the investment funds industry. bis central bankers ’ speeches from a domestic perspective, it is important to understand the linkages between the activities of these sectors and the domestic economy and any potential risks to the domestic jurisdiction. in fact, figure 3 shows that irish - resident collective investment vehicles : ( i ) have a proportionately low exposure to irish - resident assets ; and ( ii ) are owned by relatively few irish - resident investors. furthermore, these data overstate the ultimate exposure of irish residents, since these include irish - resident entities that are owned by foreign investors. put another way, irish - resident collective investment vehicles are largely invested in offshore assets and are mostly owned by foreign investors. ireland ’ s role in global financial intermediation means that traditional interpretations of balance of payments flows are not too helpful and the patterns of ultimate ownership are quite different to those suggested by the residence of investment vehicles. put differently, the geography of risk also matters. contagion can travel across borders because of the international nature of their assets and liabilities. stress arising elsewhere can affect irishresident investment vehicles, and vice versa. it follows that the central bank of ireland has a role not only to understand linkages to the domestic economy but also to work with international peers in the oversight and supervision of non - bank financial intermediaries. bis central bankers ’ speeches in related manner, figure 4 shows the currency composition of the money market funds sector. this sector is dominated by sterling - and dollar - denominated funds, with only a minor share for euro - denominated funds. this pattern further underlines the international, crossborder nature of the irish - resident funds sector. bis central bankers ’ speeches effective monitoring is a key pillar of good regulatory engagement ( moloney and murphy 2013 ). the central bank of ireland has led the way in collecting detailed data on collective investment vehicles and continues to prioritise initiatives that make data collection more efficient and effective (