the potential impact of consolidated risk management policies and internal controls on the operations of the insured depository institution. to implement this approach, the federal reserve last year began assigning a formal rating to risk management in our holding company and bank examination reports. changes have come not just in what we examine, but also in how we examine. we are making greater use of internal risk management reports, the results of internal risk models, and the work of internal and external auditors. for example, the federal reserve is now collecting internal loan classification reports prepared by most of our larger banks, as well as other information generated by their internal risk management systems. this approach has a further advantage in that it can generally be conducted off - site, at less burden to the firm. our examinations are also becoming more efficient through pre - visitation planning that better identifies those areas of a company ’ s activities that pose the greatest risk. we are also making greater use of computer technology in the examination process and using automated systems that permit examiners to analyze data on their personal computers. and, of course, whenever possible we rely upon examination and inspection reports prepared by regulators of the individual entities within the bank holding company. like examinations, disclosure practices of the past also focused narrowly on the financial condition of an institution at a point in time, using conventional accounting and regulatory measures. today, however, disclosures are expanding to reveal not only the current risks of the balance sheet, but also management ’ s philosophy for managing and controlling risk. disclosure is an important aid to us as supervisors and, we hope, to market analysts. improved disclosure has already been put into practice for derivatives and market risks, and we will continue to urge better and more broadly based disclosure of all major activities and exposures. the effect of supervisory changes on legislation as the issue of consolidated or “ umbrella ” supervision is debated in the legislative process, i believe it is important to examine how these supervisory developments alter that debate. there are those who argue that umbrella supervision of a diverse financial services holding company would either be an impossible task or an intolerable burden. but the risk - analysis and surveillance techniques that we have decided are the most effective for bank holding companies should also be adaptable to more diverse financial organizations that include banking operations. clearly, we must all give additional thought to how such an adaptation would work so that we minimize the intrusion into new activities. perhaps there should be some kind of carve - out for firms whose banking operations are a small part

understanding technology and the landscape at its most basic level, many innovations involve a technological component and are situated in a landscape of different parties who may play a role in the use of the technology. take for example, distributed ledger technology ( dlt ), including blockchain, which is the backbone of some innovations that are being explored in the financial system. dlt highlights the challenges presented to regulators in understanding innovation. there are many variations in the application of dlt - with ongoing research and development creating more variability over time - which ultimately may complicate understanding how the technology can be used and how different functionality can be incorporated into dlt solutions for different use cases. dlt provides a way for parties to record transfers of digital assets without the need for any centralized authority and relies on multiple participants who coordinate to maintain a synchronized version of the " ledger. " dlt combines a number of different design elements - like distributed data storage, cryptography, and consensus mechanisms - that support the transfer process, information visibility, and transaction recordkeeping. these design elements can be combined in a number of different ways, and different parties may play a role in its ultimate use. understanding technology is an important first step, but regulators also need to be confident in the players who operate in a particular innovative space. banks of all sizes have a long history of innovation. and the many nonbank providers in this space, including core service providers, often hold the " keys " to innovation when they facilitate the add - on of new technology to core systems. there are also fintechs that may focus on even more transformational uses of technology, in ways that can affect all aspects of 3 / 8 bis - central bankers'speeches banking. many of the parties involved in financial innovation describe themselves as financial system " disruptors. " this may be an apt word to describe some of their ambitions, but it is certainly one that proves the need for a deliberate and cautious approach to regulation. the broad range of participants involved in this space presents another layer of complication. it is especially important for regulators to be able to distill the reality from the prototype hype to achieve a comprehensive understanding necessary to inform a policy viewpoint and ultimately an effective regulatory framework. understanding the use case apart from understanding the technology, and who may use it, regulators also need to clearly understand the use case - what existing problem does this technology solve? what are the costs and benefits, and are there tradeoffs policymakers would need to consider if