As you may be aware, over the course of debating and negotiating the details of the Act, some members of Congress wanted to strengthen CRA requirements, while others wanted them rolled back. In the end, of course, the two sides compromised. Some have argued that those desiring to weaken CRA prevailed because, among other things, the Act extends the interval between compliance examinations for highly rated institutions. I disagree with this perspective. Under the new law, bank holding companies cannot become financial holding companies or engage in any financial activities newly authorized by the Act unless all of their depository institutions have CRA ratings of satisfactory or better. And should any depository institution subsidiary of an approved FHC subsequently fail to maintain a satisfactory CRA rating, the FHC would be prohibited from commencing any new financial activities. In this way, the Act extends the ramifications of poor CRA performance to potential nonbank activities. It also provides powerful incentives for expansionminded companies to achieve and maintain at least satisfactory CRA ratings. In my view, this amounts to a reaffirmation of the key principles of the Community Reinvestment Act. Revision of the 1988 Basel Accord Let me move on to the Basel Committee’s major initiative to revise the Capital Accord. The primary tool of capital regulation currently is the set of minimum ratios that were devised in 1988 by the Basel Committee on Banking Supervision, which I have the honor to chair.

Capital, in effect, helps protect firms against “runs,” both traditional “runs” where short-term funding and liquidity are at issue, and more gradual, but just as damaging “runs” on franchise value, where customers turn elsewhere for services because they question the long-term viability of a firm. Consolidation has resulted in larger and more diverse financial institutions at the core of the U.S. financial system. Deregulation has enabled firms to better optimize the scale, geographic spread, and scope of operations. The result has been the creation of some extremely large and diverse financial institutions with high earnings capacity. In 2003, 18 U.S. bank holding companies and six securities firms each earned more than $ billion, with the five largest bank holding companies earning a combined total of nearly $ billion, over 40 percent of the banking industry total. Along with capital, these earnings provide a substantial cushion to absorb losses, significantly moderating the consequences of an adverse event. The wider scope of activities and greater domestic and international geographic diversification of these firms also provide a more stable revenue base. Advances in risk management have also enabled firms to hedge risks more effectively and, in the aggregate, to disperse risk more efficiently across firms in the financial system. Given advances in data collection and risk modeling, banks and other financial firms are able to do better risk-based pricing. Firms now have the capacity to view credit and other key risks from a portfolio perspective rather than in isolation, leading to more efficient risk sharing and better capital allocation.