is targeted at new, growing, and highly profitable activities. as mentioned above, such areas have been the source of most bank losses. in summary, the federal reserve believes that its existing supervisory guidance on trading and derivatives activities at state member banks and bank holding companies is entirely consistent with, and complementary to, that of the basle committee on banking supervision and the occ. together, this supervisory guidance offers a clear set of sound practices that, when implemented appropriately, serves to enhance and support market discipline by strengthening the risk management processes of major creditors and counterparties. supervisory lessons learned [ heading? if so, bold and followed by new para. ] events in developing and developed financial markets and the various types of losses posted by banking institutions over the past two years, including recent events surrounding bank hedge fund relationships, have also provided supervisors and examiners with important lessons. from one perspective, we would like to think that effective supervision contributed to the ability of u. s. institutions to weather the financial storms of the past two years. our reviews indicated and the financial results illustrate that, while the ltcm incident and other episodes over the past two years may have significantly impacted earnings, they did not threaten the solvency of any u. s. commercial banking institution. still, our review of our own performance suggests room for enhancements on our part. within the context of the federal reserve ’ s risk - focused approach to supervision, major counterparty exposures are generally reviewed during both regular and targeted reviews of banks ’ derivatives and counterparty credit risk systems. our internal reviews found several cases where examiners, like banking institutions, may have placed too much emphasis on the full collateralization of current exposures. in the past, examiners have generally focused supervisory resources on assessing the risks entailed in unsecured credit exposures. moving forward, our guidance instructs examiners to incorporate measures of potential future exposure in stratifying samples and selecting counterparties and transactions upon which to base targeted testing of practices and internal controls, regardless of the collateralization of current market value exposures. examiners are also instructed to review the results and adequacy of an institution ’ s stress testing and scenario analyses in assessing both the magnitude and management of credit exposure. the need to emphasize in - depth transaction testing is another important supervisory lesson learned ( or relearned ) in the ltcm case, and this is emphasized in our supervisory guidance. the increasing complexity of financial markets and banking activities places a

have been in the absence of population aging. the large improvement in the estimated living standards of future generations arises because of the extra capital bequeathed to them by virtue of the current generation ’ s assumed higher rate of saving. these numbers shouldn ’ t be taken literally but the basic lesson is surely right - that the decisions that we make over the next few decades will matter greatly for the living standards of our children and grandchildren. if we don ’ t begin soon to provide for the coming demographic transition, the relative burden on future generations may be significantly greater than it otherwise could have been. 2 at the heart of the choices our elected representatives will have to make regarding the distribution of these costs across generations will be an issue of fairness : what responsibility do we, who are alive today, have to future generations? what will constitute ethical and fair treatment of those generations, see sheiner, sichel, and slifman ( 2006 ) and elmendorf and sheiner ( 2000 ) for discussions of the basic approach. another approach for gauging the potential impact of demographic change on future generations is the generational accounting framework developed by auerbach, gokhale, and kotlikoff ( 1992 ). this framework begins with the assumption that, for people living today, tax rates will not be increased and benefits will not be cut. on that assumption, one can calculate the taxes ( net of transfers received ) that future generations will have to pay to achieve long - term balance in the government budget. according to recent estimates using this approach, to achieve long - term budget balance the net tax rate on future generations will have to be about double the tax rate on current taxpayers ( gokhale and kotlikoff, 2001 ). this approach looks at the intergenerational issue through the prism of fiscal policy rather than taking the broader economic perspective i have emphasized today, and its underlying assumptions are somewhat different. however, the basic message - that failure by the current generation to address the economic implications of aging will impose significant costs on future generations - is the same. who are not present today to speak for themselves? if current trends continue, the typical u. s. worker will be considerably more productive several decades from now. thus, one might argue that letting future generations bear the burden of population aging is appropriate, as they will likely be richer than we are even taking that burden into account. on the other hand, i suspect that many people would agree that a fair outcome should involve the current