basel ii proposals and associated supervisory guidance, so there are not yet any established standards for basel ii. in some cases, we were able to identify practices used for qis4 that appeared to be clearly inconsistent with what is envisioned in the framework. in other cases, it was not easy to determine whether the practices used in qis4 would be within the expected range of acceptable practice for u. s. basel ii standards. clearly, one of the real challenges we will face as supervisors is to how to define the range of expected practice for basel ii standards, how to communicate that range to institutions, and how to deal with practices that are on the margin. uncertainty about the expectations placed on institutions does not benefit supervisors or bankers. one of the key ways to reduce that uncertainty would be to continue our communication with the industry broadly, and with institutions individually, during the entire implementation process. certainly, as we move closer to implementation, supervisory oversight of the basel ii implementation methodologies by our examination teams will increase. indeed, during the qualification process, we expect to have several additional opportunities to evaluate institutions ’ risk - management processes, models, and estimates - - and provide feedback to the institutions on their progress. so qis4, an assessment conducted at one point in time, should not be considered a complete forecast of institutions ’ future basel ii capabilities or the framework ’ s ultimate effects. but qis4 did give a very useful insight into the linkage between capital and risks, and how institutions are attempting to quantify that linkage. indeed, it was one of the best glimpses we had to date. as we move forward with basel ii implementation, we expect to gather even more useful supervisory information about banks ’ progress in meeting basel ii standards, the potential impact of the framework, and, perhaps most importantly, banks ’ ability to measure and manage the risks to which they are exposed. as supervisors, we will highly value this opportunity to enhance our understanding of banking organizations, which we believe will promote safety and soundness in the banking system. identifying and addressing home - host issues given this extensive international audience, it might be helpful for me to offer the federal reserve ’ s perspective of the so - called “ home - host ” aspects of basel ii implementation - - a perspective that i believe is shared by my u. s. supervisory colleagues. first, we recognize that some may have concerns about the recent announcement by the u. s. agencies to implement basel ii with a one - year delay

greater synchronization in asset markets. global shocks ( for example, from oil prices and geopolitical risk factors ) that produce broadly similar effects on most economies may have become more prevalent and may tend to dominate idiosyncratic national shocks. but it also is quite possible that greater international diversification of portfolios now allows developments affecting assets in one country to spill over into markets of others - both at the level of particular industries and more broadly. if synchronization of asset price movements comes about mainly in this way, the suggestion is that excess liquidity in one country could move asset prices in another, perhaps significantly, even if liquidity was well contained in the latter. 12 in the somewhat longer run, patterns of aggregate saving - influenced, for example, by demographic developments - may also affect the path of real interest rates and, in turn, prices of assets, again complicating interpretation of co - movements. for instance, an increase in savings as a growing share of the population nears retirement may reduce real rates and raise asset prices. patterns of immigration that affect the population's demographic profile, too, can affect asset prices. in the united states, we have seen some of these effects in certain segments of the housing market. conclusions in summary, although excess liquidity has been cited as a source of general asset price instability, the support for this conclusion is mixed, at best. we do find a positive correlation between growth rates of real house prices and m3, but the correlation does not seem to hold for real asset prices more generally - including, in particular, equities. in this talk, i have suggested that we are only at the beginning of an understanding of some of these relationships. even if an underlying causal link exists between some real asset prices and liquidity, many additional factors may be influencing what we see, with potential for misleading us in interpreting simple associations or correlations. the problem obviously is complex. as a start, however, we need a better understanding of how asset prices are determined that can be translated into guidance for a policy process that uses real - time variables. to borrow a turn of phrase cited often in the physical sciences, theory tends to " explain a complex visible, with a simple invisible. " 13 in the realm of policy, of course, we need to work with simple, but reliable visibles - a requirement that makes this task all the more challenging. for that reason, i have been pleased to join this group of