prices are not readily available, may lead to increased volatility or fluctuation in reported results. such accounting practices may actually obscure underlying trends or developments affecting a firm ’ s condition and performance. requiring companies to adopt market value accounting where it is not consistent with business strategies can cause them to incur significant costs to provide information that may not realistically reflect way underlying circumstances or trends in performance. moreover, from the standpoint of financial statement analysts and other users, having to make adjustments to remove the effects of meaningless accounting volatility from income statements and balance sheets can also impose significant costs without offsetting benefits. the board believes that these problems can be minimized by having large firms with active trading portfolios place market values in supplemental disclosures rather than by forcing their use in the primary financial statements. such an approach would give analysts the information they need, without imposing costs on an unnecessarily wide range of firms and without imposing the broader costs of having to reverse or “ back out ” the distorting effects of the proposed accounting standard. emerging challenges to risk management without a doubt, banking institutions have made significant progress in implementing new techniques and methods in risk management. to date, most work in this area has centered around the “ science ” of risk management - - that is, the quantitative measurement of risk. however, quantitative measurement is only one element of the overall process of financial risk management. other elements such as board and senior management oversight, internal controls, and the role of internal and external audits are just as important. given the pace of technological and financial innovation, inadequate internal controls can expose an institution to significant risk. indeed, inadequate management oversight, combined with a lack of internal controls, has been the primary cause of the losses experienced by several high profile major international banking organizations. in some cases basic time - honored internal controls such as segmentation of duties and independent risk assessment had been ignored. in others, internal management processes have failed to keep pace with technological development, financial innovation, and global expansion. it is these “ low tech ” areas that pose continued challenges to risk management. - 5some institutions are beginning to address these challenges in their attempts to identify, monitor and control the operating risks of various business lines. indeed, operating risk is quickly emerging as the next frontier of risk management. while no clear standardized definition of operating risk has yet emerged, several progressive institutions are expending significant resources to address the operating risks inherent in particular business lines. for some

, this involves conducting extensive risk assessments throughout business and product lines to identify both the types of processing, information, and personnel risks that exist and the potential measures that can be taken to mitigate them. others are buttressing these assessments with attempts actually to quantify and charge internal capital for operating risk exposures. supervisors can also be expected to more closely monitor banks ’ efforts to identify and manage operating risks. one very important operating risk that all banking institutions face is the challenge of addressing the year 2000 issue. u. s. banks appear to be taking this matter seriously and are generally well underway toward identifying individual needs and developing action plans. the federal reserve and the other federal bank supervisors are reviewing the relevant efforts of every insured depository institution in order to determine whether adequate progress on this issue is being made. meeting the demands of this review and ensuring proper remedies both before and after the year 2000 will be a significant and costly task to both the industry and the banking agencies. however, even within the context of banking, the scope of the year 2000 problem extends far beyond u. s. banks to foreign banks, bank borrowers, depositors, vendors, and other counterparties. banks and others need to address year 2000 system alterations, not only because of the potential effects on overall markets, but also as a threat to individual firm viability. at a minimum, banks should be concerned about their ability to provide uninterrupted service to their customers into the next millennium. if nothing else, it is simply good business. summary in summary, advances in computerization and communications have created a paradigm shift for financial markets, the financial services industry, and the management of financial risks. in response, supervisors are also moving to a new, more “ incentive - compatible ” regime of greater reliance on banks ’ own risk measures and internal controls. this transformation may be slow and will be challenging for all. supervisors can encourage innovation, but the private sector must do much of the development work. as always, a transition to an improved framework will work best with cooperative, open dialogue between the financial industry and its regulators, so that compatible and efficient answers are found. in today ’ s markets, institutions and financial systems are linked as never before, and such connections are likely to grow in the years ahead. how effectively institutions manage their risks and allocate their capital will have substantial consequences for economic growth. we have seen significant progress in measuring market risk, and the groundwork is being laid