outline suggested changes to basel i. in part, these proposed changes are meant to address concerns about the potential adverse competitive effects of basel ii. the federal reserve takes concerns about competitive effects seriously and has conducted substantial research on the topic. during the process to amend basel i, we sought input from the industry and other interested parties. in view of those concerns, regulators have proposed changes to enhance the risk sensitivity of u. s. basel i rules ; we also remain vigilant about identifying potential competitive distortions that might be created with the introduction of basel ii. we are also mindful that amendments to basel i should not be too complex or too burdensome for the multitude of smaller banks to which the revised rules would apply. that is, in amending basel i for these institutions, we are trying to find the right balance between added risk sensitivity and regulatory burden. that balance is not necessarily easy to find. for example, one way to tie regulatory capital more closely to risk under basel i would be to expand the number of factors used to determine risk weights - for example, to include credit scores or external credit ratings. the tradeoff is that incorporating additional risk measures is likely to increase the burden of calculating regulatory capital. the comments received suggest that institutions differ on how best to make this tradeoff. we will continue to evaluate this tradeoff and solicit further comments on how to proceed. conclusion we expect that risk management and banking supervision will continue to develop along parallel tracks. the basel ii framework represents an important effort by supervisors to integrate leading - edge risk management practices with the calculation of regulatory capital requirements. the ongoing work on this framework has already led large, complex banking organizations to improve their systems for identifying, measuring, and managing their risks. indeed, banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. the banking agencies will continue to promote supervisory approaches that complement and support banks'own efforts to enhance their risk - management capabilities.

##bank ’ s various tasks that is the most important explanatory factor behind the focus of our asset management. it is only when we have reasonably ensured that we can carry out these tasks that we take financial risks in order to generate earnings. in the following i shall describe in more detail how this balance is attained. in practice it is a question of the riksbank ’ s exposure to three different types of risk ; currency risk, interest rate risk and credit risk. currency risk currency risk is by far the largest risk in our balance sheet. it arises when the krona appreciates or depreciates in relation to the currencies in the foreign exchange reserve. this means that the riksbank ’ s profit and loss account and balance sheet are valued in kronor. an appreciation of the krona reduces the value of our foreign exchange reserve and a depreciation increases it. when the krona appreciates it is thus a negative event to the extent that it leads to exchange losses that are booked in the riksbank ’ s balance sheet. if these losses are too large, there is a risk that they must be covered by the capital the riksbank has allocated for use in potential financial crises and to cover the bank ’ s day - to - day operations. there is therefore reason to limit the impact of a krona appreciation on the riksbank ’ s results. however, the possibility to do so is limited by the fact that we must have currency assets in order to intervene in the foreign exchange market. the need for intervention capacity in the form of foreign assets is determined by the prevailing exchange rate regime. under a fixed exchange rate regime the central bank may need to intervene relatively often, which means that the need for intervention assets is considerable. this need is usually much lower with a floating exchange rate regime 7. however, according to law, the riksbank must be able to implement the exchange rate regime that the government has stipulated for the krona, regardless of whether this is fixed or floating. this means that the currency holding is ultimately determined by the needs of a fixed exchange rate regime. at present, however, we have a floating exchange rate regime, which gives us scope to limit the currency risk. we do this by ensuring that our holdings of the important intervention currencies, i. e. euro and us dollar, are no larger than can be justified for reasons of intervention or diversification. diversification is the possibility we have to reduce