handbook of banking, oxford university press. this paper surveys all the relevant academic research with respect to the three categories and relates them to the present crisis where applicable. this tendency of financial systems towards boom - bust cycles goes back, for example, to the work by minsky ( 1977 ), “ a theory of systemic fragility ”, in altman and sametz, financial crises, wiley. notably, observers from the bank for international settlements, such as bill white and claudio borio, warned before 2007 that such imbalances were building up. for example, gorton ( 1988 ), “ banking panics and business cycles ”, oxford economic papers, 40, observes that most us banking crises during the national banking era could have been predicted with a simple business cycle model. see, for example, acharya, pedersen, philippon and richardson ( 2009 ), “ regulating systemic risk ”, in acharya and richardson ( eds. ), restoring financial stability : how to repair a failed system, wiley ; lo ( 2008 ), “ hedge funds, systemic risk, and the financial crisis of 2007 - 2008 ”, written testimony prepared for the us house of representatives, committee on oversight and government reforms, hearing on hedge funds, november. basel committee on banking supervision, “ comprehensive response to the global banking crisis ”, press release, 7 september 2009. system and potentially to a financial crisis. it would have to pay attention to the sources of the three forms of systemic risk discussed earlier – contagion, imbalances and macro shocks. risk monitoring should identify sources of risks and vulnerability coming from within the financial system – i. e. stemming from financial institutions, markets or market infrastructure – and also those present in the macroeconomic environment and non - financial related events. these would include vulnerabilities resulting from global imbalances, growth prospects, developments in housing markets, creditworthiness of borrowers, to name a few. the monitoring involves processing large amounts of ( often disparate ) information of a statistical nature and is based on market sources. in addition, continuous market intelligence efforts are essential for effective risk monitoring and the early detection of new financial instruments, practices or business strategies which could create vulnerabilities and risks in financial markets. in the case of the risk board, market intelligence will be complemented by what could be called “ institutional intelligence ” and “ policy intelligence ”, given the qualitative information and expert knowledge available to central banks and

ii implementation. as you probably know, the agencies issued a statement on april 29 indicating that results from qis4 were more widely dispersed and showed a larger overall drop in capital than we had expected. this was the impetus for deciding to delay issuance of our next round of proposals for basel ii. these unexpected results show the continued benefit of conducting periodic quantitative impact studies. they serve as a milestone to help us calibrate the progress of the framework and the bankers as we move to basel ii. we now must determine the reasons for the unexpected results from qis4. do they reflect actual differences in risk among respondents when prior supervisory information suggested more similarity in credit quality? none of the participating banks has completed their databases and models for all of their risk areas. in some cases, this created results that would not be reliable for implementing basel ii. for example, for some portfolios, expected losses reflected only the last year or two of results. thus, the strong credit performance of recent experience was not balanced by higher losses at other points of the credit cycle. were there limits of the qis4 exercise itself? is there a possible need for adjustments to the basel framework? analyzing the data used in qis4 is vitally important, because ultimately the success of basel ii will depend on the quantity and quality of data that banks have to use as inputs to the framework. u. s. regulators expect to provide additional information on the lessons we learn from the qis4 review in the near future. the notice of proposed rulemaking ( npr ) for basel ii will incorporate what we learn from this exercise. but we really are caught in a process dilemma. bankers cannot complete their models and collect the necessary data until they know what the specific requirements will be. regulators, on the other hand, will have to develop these requirements before seeing the actual results of these models and robust databases. given what a vast undertaking basel ii is, this seems entirely appropriate and beneficial. in addition to what we learn from the work on qis4 results, we will also assess the trading and banking book comments of the basel committee on banking supervision and the international organization of securities commissions. we will incorporate the latest proposal into the notice of proposed rulemaking and hope to complete our efforts in a timely manner. in addition, under our current plans, we also will be delaying issuance of an advance notice of proposed rulemaking to revise current capital rules for non - basel ii banks. u. s. banking regulators