The second element is for supervisors to conduct independent reviews of a bank’s capital adequacy relative to its risk profile, while the third is to help improve the ability of market forces to exert discipline on management behavior. These last two elements, which I will address in more detail in a moment, have been adopted by the Basel Committee as key parts of our proposal to revise the international standards on capital regulation. Risk-focused supervision In terms of the "risk-focused" approach to supervision, many of my colleagues would agree that what makes bank supervision so challenging is the need to keep pace with such a dynamic, fast-moving, and diverse industry. Consequently, supervision must be adaptive. The banking industry is intensely competitive and firms must constantly identify new markets, new products, and new ways to do business. Innovative products and technologies can quickly alter a bank’s exposure to risk. Continuous innovation in the industry and increasingly rapid changes in risk profiles demand that supervisors, too, keep up with the latest developments and work to anticipate them to ensure that our regulatory framework remains relevant and timely. Likewise, supervision needs to be flexible. We all know that the banking sector encompasses organizations that vary greatly in scope, size, and risk appetite, so it’s obvious that regulations that are useful for small, community mortgage banks will not apply equally well to massive, multinational trading banks, and vice versa.
You will immediately discern upon descending to the bedrock of Manhattan, marveling at the massive vault door, appreciating the multi-faceted control environment, that payments security is a timeless preoccupation. Hardly any of the gold in the vaults of the Federal Reserve Bank of New York is the property of the United States, whose reserves you know from 007 lore reside in Ft. Knox. Instead, it is gold held on behalf of foreign and international monetary authorities. Indulge me, if you will, in a fascinating historical anecdote in the annals of official reserve custody, which I will endeavor, perhaps feebly, to tie to today’s theme. The Spanish Civil War was a brutal conflict that pitted Nationalist rebel forces, allied with Fascist Italy and Nazi Germany, against the Republican government supported by the Soviet Union. In 1938, with their government on the cusp of implosion and before fleeing into exile, the Republicans hastily sent their gold stock to their trusted ally, the Soviet Union, for safekeeping. This episode is recounted in a history of the Spanish Civil War by Hugh Thomas, who writes the following: According to Orlov (now I confess to not reading the whole book, so I do not actually know who Orlov is; nevertheless, according to no less an authority than Orlov!