my central message is that the core principles of risk management remain just that - - core principles. the improved techniques that the new technologies provide can improve matters only if they remain rooted in these core principles. in this context, i am reminded of the old back - to - the - future theme in science fiction in which an individual travels back in time and, by his presence, nearly alters history to his or our disadvantage. in dealing with the complex, fast - paced, and highly competitive businesses of today, many institutions may face a similar risk. institutions have the ability, as a result of available technology and financial innovation, to change their activities and risk profiles quickly, but they may not always employ the controls necessary to prevent unexpected and untoward results. many firms have already eliminated lower - and middle - management positions in response to competitive pressures. though such actions probably improved the cost - efficiency ratios of banks and helped them meet earnings expectations, they also could, if not done carefully, increase the likelihood that new weaknesses will appear. that is to say, institutions must take a sufficiently long - term perspective in their decisionmaking and not pursue purely short - term remedies to high operating costs. banking is a highly leveraged and, in many respects, low - margin business. losses from a single bad loan or a material breakdown in controls can eliminate the gain on many other transactions. the continued ability to identify and manage risks and to maintain the proper internal controls is critical in banking organizations even as they seek to increase profits and profitability. indeed, the acceptance and the application of the current innovations in risk - management techniques are going to require expense and some dramatic changes in the way most large banking organizations do business. many banks, i am afraid, are falling below the curve, perhaps on the basis of short - run cost - benefit analysis. in my view, failure to make these outlays and changes now will put at risk these banks'long - run profitability as financial transactions grow increasingly complex. the thrust of basel ii and, independently, our supervisory approach will disadvantage entities that do not prepare themselves by adopting these innovative techniques to handle the ever more complex financial transactions. new technologies and techniques must be adopted if financial institutions are to avoid repeating problems and if the banking system is to be as successful in accepting risk in the future as it has been in the past. important experiences over the past thirty years, the banking industry has faced many challenges. in the 1970s, large banks here and abroad

sharply increased their exposures to the emerging economies of latin america and other regions, as they recycled the deposits of oil - rich nations. although profit opportunities for the banks looked attractive for a while, the picture had clearly changed by the 1980s, and most lenders incurred sizable losses on their foreign loans as they reduced their exposures. the industry's problems during the 1980s were more domestic in nature. for many community banks, weak agricultural markets in the last half of the decade created difficulties throughout the midwest and contributed to the failure of hundreds of small community banks. by the end of the decade, excessive exposure to overbuilt commercial real estate markets had undermined the financial strength of a number of large money - center and regional banks. those problems forced several of these institutions to fail or otherwise to lose their independence and contributed to a wave of industry consolidation and national reforms in our domestic banking laws and regulations. in contrast, most of the 1990s can be viewed calmly and with a certain satisfaction ; indeed, the industry can be pleased about many things. after the first few years of the past decade, the number and the cost of bank failures dropped sharply, the banking system posted an impressive performance virtually every year, and many investors and former owners of banks liquidated their holdings at nice profits as the industry consolidated. recently, a few banks have experienced problems of a less widespread nature than those of the 1970s and 1980s. last month, for example, a large foreign bank discovered trading losses in its u. s. subsidiary bank that had apparently increased substantially and gone undetected for some time. also last month, the fdic seized a $ 70 million bank in ohio after examiners uncovered a $ 40 million embezzlement. several years earlier, a bank in west virginia was closed after examiners alleged bank managers hid extensive losses related to complex securitized transactions. these experiences remind us that even a decade of solid performance does not allow anyone to become complacent. virtually all these major problems, whether they involved fraud or honest misjudgment of risk, can - - almost by definition - - be traced to weaknesses in an organization's risk - management and corporate - governance. judgments are always easier in hindsight, but failure to apply fundamental principles of management is often the root of material business problems. managing and controlling risk although a few failures are the product of fraud, the key risk in banking remains credit risk - - the risk that a borrower will default. if