end of the 1980s, more than 200 banks were failing annually, and there were more than 1, 000 other problem banks. this experience provided important lessons and forced supervisors and bankers, alike, to reconsider the way they approached their jobs. for their part, bankers recognized the need to build their capital and reserves, strengthen their internal controls, and improve practices for identifying, underwriting and managing risk. supervisors were also reminded of the need to remain vigilant and of the high costs that bank failures can bring, not only to the insurance fund but to local communities as well. the fdic improvement act of 1991 emphasized that point, requiring frequent examinations and prompt regulatory actions when serious problems emerge. beyond these largely domestic, institutional events, banks and businesses throughout the world were dealing in the 1980s and 1990s with new technologies that were leading to a multitude of new and increasingly complex financial products that changed the nature of banking and financial markets. these technologies have brought many benefits that facilitate more efficient markets and, in turn, greater international trade and economic growth. they may also, however, have raised macro - stability concerns by concentrating the growing volume and complexity of certain activities within a small number of truly global institutions. it is essential that these largest firms adequately manage the related risks of these activities and that they remain adequately supervised. for it is these institutions that have the potential to disrupt worldwide payment systems and contribute most to systemic risk. in addition to the formal supervisory oversight exerted by regulators, concerns may be eased somewhat by the strong counterparty discipline being brought to bear world wide on banks and other financial institutions dealing in these new products. the scrutiny among counterparties in the global market place has contributed to improvements in capital positions and in overall risk management practices. in many ways, u. s. banks have been in the vanguard in applying technological advances to their products, distribution systems, and management processes, with such applications and innovations as atms, home banking, securitizations and credit derivatives. such efforts, combined with greater attention to pricing their services and measuring their risks, have had material effects on the increased strength and profitability that our banks have seen. within the united states, our banking system has also experienced a dramatic consolidation in the number of banking institutions, with the number of independent commercial banking organizations declining from 12, 400 in 1980 to 7, 400 in june of this year. 1 that structural change has also contributed to industry earnings by providing banks with greater opportunities to reduce costs. the challenge

an economic advisor to the government puts the bank in a constantly contentious position vis a vis the government and may undermine the banks ’ independence in its core responsibility. i was the director of the research department at that time, and argued in favor of maintaining the role of economic advisor in the law, which was eventually what was decided. several years later, when i became governor, i met stan ( in basel, at a bis meeting ) following one of the heated debates i had with the government, and told him that now i understand and sympathize with his initial view against having the role of the economic advisor. stan surprised me when he said that looking from the outside, he is even more convinced of the importance of this role of the bank of israel. this question was also posed to an independent evaluation committee which was invited to evaluate the boi ’ s research department back in 2012. in their report, they said, and i quote : “ we came to the bank very skeptical of any central bank having the responsibility of being an advisor, much less the advisor, to the government on economic policy ". following a thorough discussion 1 / 3 bis central bankers'speeches with many relevant stakeholders within and outside the bank, they concluded : “ absent fundamental changes in other israeli institutions, we agree that the bank must continue to play the critical role of advisor to the government policy " indeed, the argument against the cb ’ s role in economic policy advice because it enhances the friction between the bank and the government and thus may undermine the bank ’ s independence in its core responsibilities is not unique to the role of economic advisor. in fact, this debate resembles the discussion regarding the question that is debated extensively among central bankers as to how wide should our responsibilities and mandates be defined. i have heard the argument that in some issues the decisions reflect political priorities as opposed to pure economic welfare maximization decisions, and therefore should be left to the politicians, or that they may undermine the central banks ’ credibility or independence. these are valid arguments, and certainly, my tenure as governor has demonstrated that providing a wellgrounded position on some sensitive or publically debated policy issues does raise the level of friction with the government. however, when we think about designing institutions, we should not think in the abstract, and we never start from scratch. we should take the starting point into account, and asses what is the likelihood that a change will get us closer to some “ ideal institutional design ” ( if such exists ).