, including possible deleterious effects on the innovation process. while i have discussed some examples of incentive - compatible regulation that appear to be working, we have a very long way to go. for example, banking regulators have yet to reach a consensus on some of the most basic questions associated with prudential supervision - questions such as what is an appropriate conceptual basis for assessing a financial institution ’ s overall risk exposure, how should such risk exposures be measured, and if we use internal management models for such measurements, how can these models be validated? the revolution in risk measurement techniques makes the answers to these questions approachable but not without significant effort on the part of the regulators and the financial industry itself. i am confident that all parties are both willing and able to solve the challenges that confront us. it is clearly in our mutual self - interest to do so. our success will preserve not only the benefits of the most competitive and innovative financial markets in the world, but also the benefits of financial stability that are critical to our economy.

donald l kohn : condition of the us banking system testimony of mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, before the committee on banking, housing, and urban affairs, us senate, washington dc, 4 march 2008. * * * chairman dodd, ranking member shelby and members of the committee, it is my pleasure to appear today to discuss the condition of the u. s. banking system. in my remarks, i will summarize briefly the role of the federal reserve in banking supervision, provide an overall view of the health of the u. s. banking system, and then discuss some key areas of supervisory focus. the u. s. banking system is facing some challenges, but remains in sound overall condition, having entered the period of recent financial turmoil with solid capital and strong earnings. the problems in the mortgage and housing markets have been highly unusual and clearly some banking organizations have failed to manage their exposures well and have suffered losses as a result. but in general these losses should not threaten their viability. we, along with the other banking agencies, have been working with banking organizations to identify and rectify those shortcomings in risk management and to ensure that the banking system continues to be safe and sound. role of the federal reserve in banking supervision the federal reserve has supervisory and regulatory authority over a wide range of financial institutions and activities. it works with other federal and state supervisory authorities to ensure the safety and soundness of the banking industry, the stability of the financial system, and fair and equitable treatment of consumers in their financial transactions. while the federal reserve is not the primary federal supervisor for the majority of commercial bank assets, it plays an important role as the " umbrella supervisor " of bank holding companies. the bank holding companies supervised by the federal reserve number approximately 5, 000 and have consolidated assets of about $ 14. 2 trillion. the federal reserve conducts inspections of all large, regional, and complex bank holding companies and maintains inspection teams on - site at the largest bank holding companies. for smaller less complex organizations, supervision is conducted through a combination of off - site monitoring and on - site inspections. these inspections, which are conducted using established procedures, manuals, and techniques, allow the federal reserve to review the organization's systems for identifying and managing risk across the organization and its various legal entities and to evaluate the overall financial strength of the organization. the primary purpose of these inspections is to ensure that the holding company