trained and qualified personnel. within the united states, our banking system has also experienced a dramatic consolidation in the number of banking institutions, due not only to technology and financial innovation, but also to legislative changes allowing interstate banking. the number of independent commercial banking organizations has declined 40 percent since 1980 to 7, 400 in june of this year. while possibly stressful to many bankers and bank customers, this dramatic structural change has also contributed to industry earnings by providing banks with greater opportunities to reduce costs. a challenge now for many institutions may be to manage their growth and the continuing process of industry consolidation. this challenge may be greatest as banking organizations expand into more diverse or nontraditional banking activities, particularly through acquisitions. growth into a wider array of activities is especially important if banks are to meet the wide - ranging needs of their business and household customers, while competing effectively with other regulated and unregulated firms. as you know, the congress has been wrestling with the issue of banking powers for years and - - with the exception of interstate branching - - has yet to make much progress. the federal reserve has long believed that legislation is needed and that the industry can best move forward if this issue is resolved by lawmakers, rather than by regulators in a piecemeal fashion. nevertheless, with or without legislation, we must all deal with changing markets and with the opportunities and pressures they present. utilizing existing legislative authority, regulators have been able to approve new banking products that were not available a decade ago, as financial markets and products have evolved. however, whether future expansion comes through new laws or merely through new interpretations of current laws and regulations, it is important that the banking industry use its powers wisely and that its performance remain sound. supervisory challenges ahead in supervising this “ industry - in - transition ”, the federal reserve has no shortage of tasks, despite the virtually unprecedented strong condition of the u. s. banking system today. we, too, must deal with the evolving financial markets and advances in technology. at the same time, we must ensure that our own supervisory practices, tools, and standards take advantage of improving technology and financial techniques so that our oversight is not only effective, but also as unobtrusive and as appropriate as possible. these tasks are wide ranging, extending from our own re - engineering of the supervisory process to the way supervisors approach such issues as measuring capital adequacy and international convergence of supervisory standards. constructing a sound supervisory process while minimizing regulatory burden has been

ms. phillips discusses trends and challenges in federal reserve bank supervision remarks by ms. susan m. phillips, a member of the board of governors of the us federal reserve system, at houston baptist university, houston, texas on 30 / 10 / 97. trends and challenges in federal reserve bank supervision i am pleased to be here today to talk with you about some of the important, fundamental changes taking place within the u. s. banking system and the effects those changes are having on the federal reserve ’ s supervisory process. as you know, the u. s. economy and banking system have enjoyed more than half a decade of improving strength and prosperity in which u. s. banks have become better capitalized and more profitable than they have been in generations. moreover, in the past 13 months not a single insured bank has failed, and the bank insurance fund is now capitalized at a level requiring most banks to pay only nominal fees for their insurance. while this situation is a vast improvement over conditions in earlier years, experience has demonstrated that at times like these - - if we are not vigilant - - risks can occur that set the stage for future problems. that ’ s what makes supervising banks so interesting and such a challenge. when the economy and the banking industry are in difficulty, supervisors must identify and address immediate problems in an effort to protect the u. s. taxpayer and the federal safety net. when conditions are good, as they are today, supervisors have the opportunity to review their oversight process and promote sound practices for managing banking risks in an effort to avert or mitigate future problems. this and keeping up with the pace of financial innovation and industry change that has occurred in the past 5 to 10 years has been a challenge, indeed. as i begin my remarks, i would like to point out that no system of supervision or regulation can provide total assurance that banking problems will not occur or that banks will not fail. nor should it. any process that prevents all banking problems would be extremely invasive to banking organizations and would likely inhibit economic growth. as financial intermediaries, banks must take risks if they and their communities are to grow. as risk - takers, some banks will necessarily incur losses, and some will eventually fail. the objective is to contain the costs of risk - taking, both to individual institutions and to the safety net, more generally. therefore, our goal as regulators is to help identify weak banking practices so that small or emerging problems can be addressed before they