diminished. the revisions of basel ii also address internal controls through a proposed capital charge for operational risk. developments such as the widespread adoption of technology, large - scale mergers, e - commerce, and the increased prevalence of outsourcing, can increase operational risk. while the regulatory reforms are being developed - - and in the interim before a formal revision to the basel accord - - supervisors will continue evaluating management's ability to control operational risk. this aspect of the effort to amend the accord has been criticized by some in the industry either as unnecessary or as creating a formulaic approach that is only a crude approx - imation of a proper capital charge. i suggest the events of september 11 indicate that operational risk is an issue that cannot be ignored. i invite both internal and external auditors to monitor basel ii and offer their counsel on how best to reflect operational risk in capital. both managers and supervisors focused on the operational aspects of banking in the years leading up to year 2000, a date that was uneventful in large part because of the preparations that were made. now we know that the possible loss of physical facilities and key personnel, which were generally not considered as part of y2k planning, must be factored into financial firms'disaster - recovery scenarios. similarly, providing reliable backup to key infrastructure - - electricity, telephone, water - - is likely to play a larger role in financial institutions'planning. as we go forward, the operational preparedness of regulated institutions will figure more prominently in our supervisory program. the role of the external auditor in the banking sector the federal reserve and other supervisory agencies have long recognized the key role that the accounting and auditing profession plays in assessing internal controls. guidance issued by the federal reserve and other regulatory agencies reflects the important role that both internal and external auditing play in enhancing internal systems and monitoring risk. as required by statute, banking organizations with assets of more than $ 500 million must have annual independent audits. the banking agencies encourage all small institutions to follow suit. in a similar vein, the basel committee has produced extensive guidance on the roles of both the external audit and internal audit and the ways these can be factored into the supervisory process. as i said, market discipline is becoming a key element of supervisory thinking, and market discipline depends on prompt, accurate financial information. external auditors help significantly in ensuring that financial statements are reliable and useful to the marketplace. periodic financial statements of banking organizations are also used by the federal reserve in our risk -

##ntial approach to supervising and regulating at least some parts of this sector. thanks again to the hoover institution for having me, and i look forward to the discussion that follows. 1 board of governors of the federal reserve system, " federal reserve issues fomc statement, " press release, september 16, 2020. return to text 2 " assets and liabilities of commercial banks in the united states – h. 8, " last modified october 9, 2020. return to text 3 board of governors of the federal reserve system, " federal reserve board announces temporary change to its supplementary leverage ratio rule to ease strains in the treasury market resulting from the coronavirus and increase banking organizations ’ ability to provide credit to households and businesses, " press release, april 1, 2020. return to text 4 " coronavirus disease 2019 ( covid - 19 ), " board of governors of the federal reserve system, last modified, april 30, 2020. return to text 5 board of governors of the federal reserve system, assessment of bank capital during the recent coronavirus event ( pdf ) ( washington : board of governors, june 2020 ). return to text 6 board of governors of the federal reserve system, supervisory scenarios for the resubmission of capital plans in the fourth quarter of 2020 ( washington : board of governors, september 2020 ). return to text 7 board of governors of the federal reserve system, " federal reserve issues fomc statement, " press release, march 23, 2020. return to text 8 financial stability board. " fsb publishes annual report on nonbank financial intermediation, " press release, january 19, 2020. return to text 4 / 4 bis central bankers'speeches