mr meyer highlights several issues on the fed ’ s agenda for bank supervision and regulation remarks by mr laurence h meyer, member of the board of governors of the us federal reserve system, before the institute of international bankers annual breakfast dialogue, held in washington, d. c. on 27 september 1999. * * * i am delighted to have this opportunity to join with the other distinguished members of this panel before the institute of international bankers. my goal this morning is to highlight several issues on the fed ’ s agenda for bank supervision and regulation. the first item never seems to leave the agenda : financial modernization. the issue has two sides : the market process and the legal framework. in the market - driven process, financial institutions are increasingly competing with each other – with banks seeking to expand the financial services they offer within banking organizations and, at the same time, non - bank financial institutions offering many bank - like products. this process has been under way for years, though constrained by the prevailing statutory limits. legislation would allow the market process to evolve further and would, in addition, refine the supervisory and regulatory framework for the diversified financial services firms that would emerge as a result of the legislation. many of you know the details of the disagreement between treasury and the federal reserve over what that supervisory framework and permissible structure should look like. rather than restating those details, let me simply express the hope that the efforts of the regulators and congress will ultimately be successful – in this millennium – in moving the bill to passage. being optimistic by nature, i turn to the challenges for both the banking system and the supervisors in adapting to the changes in banking and financial services that the passage of legislation would set in motion. developing cooperation and coordination among the multiple supervisors of financial services firms would be one of the first. financial modernization envisions a blend of functional and umbrella supervision. depository institutions would continue to be supervised by their current bank or thrift regulators, with functional regulation of the new non - bank activities by their specialized regulators and umbrella supervision of the diversified financial services holding company by the federal reserve. this approach has a lot to recommend it but requires a high degree of cooperation and coordination between and among the bank supervisors and the functional regulators, specifically securities and insurance. this cooperation is essential to limit the regulatory burden otherwise associated with multiple regulators. bank supervisors need to be well informed about the risks to the banking organization – and the depository institution in particular – from activities taking place in affiliates and, perhaps also in

measures implemented to strengthen domestic frameworks. these include wide ranging measures to develop regional financial markets, to improve liquidity management across borders, to strengthen cooperation networks for the supervision of regionally - active financial institutions and to establish regional infrastructure to enhance the efficiency and lower the risks associated with cross - border payments and settlements. regional arrangements between central banks and supervisory authorities have also been significantly strengthened to actively share information on emerging risks to regional stability and where necessary to coordinate regional responses. an important part of this includes the ongoing work to enhance the frameworks for crisis management including the orderly resolution of financial institutions with significant cross - border operations. within the asean region, measures are currently being pursued to promote greater consistency in the adoption of regulatory and supervisory standards in anticipation of a larger role for asean banks in driving regional integration as part of the broader agenda to realise an asean economic community by 2015. collectively, these arrangements aim to ensure that the expansion of bis central bankers ’ speeches cross - border financial linkages takes place within a framework and process that adequately mitigates systemic risk across borders. fifth, central banks and regulatory authorities in most emerging economies in asia have the broader mandate that includes a focus on the development of the financial sector as a means not only to enhance the growth and development potential, but also to reinforce a strong foundation for financial stability. in malaysia, the development and reform of the financial sector in the decade that followed the asian financial crisis has not only developed the financial sector to better serve the malaysian economy, but it has also better positioned financial institutions to withstand the destabilising episodes emanating from external shocks. this has included strengthening financial intermediaries, not only in terms of scale but also in their financial positions, risk management and governance practices. this has contributed to more efficient financial intermediation while improving access to financing, particularly for small and medium scale businesses. efforts to develop a vibrant capital market have meanwhile opened up alternative channels for financing, while mitigating concentration risk in the financial system and enhancing its ability to absorb large and volatile cross - border capital flows. these factors will place asia on a firm foundation to achieve its growth and development goals. while public policy clearly has an important role, it is as important for the financial industry to align itself with the desired outcomes of sustainable growth within a longer term horizon. this will involve a number of important considerations for financial institutions, including the rethinking of business models in the light of a re - assessment of risk and return expectations