series of meetings and discussions among bank of america, the regulatory agencies, and treasury. during these discussions, bank of america's ceo, ken lewis, told us that the company was considering invoking the material adverse event clause in the acquisition contract, known as the mac, in an attempt to rescind its agreement to acquire merrill lynch. in responding to bank of america in these discussions, i expressed concern that invoking the mac would entail significant risks, not only for the financial system as a whole but also for bank of america itself, for three reasons. first, in light of the extreme fragility of the financial system at the time, the uncertainties created by an invocation of the mac might have triggered a broader systemic crisis that could well have destabilized bank of america as well as merrill lynch. second, an attempt to invoke the mac after three months of review, preparation, and public remarks by the management of bank of america about the benefits of the acquisition would cast doubt in the minds of financial market participants – including the investors, creditors, and customers of bank of america – about the due diligence and analysis done by the company, its capability to consummate significant acquisitions, its overall risk - management processes, and the judgment of its management. third, based on our staff analysis of the legal issues, we believed that it was highly unlikely that bank of america would be successful in terminating the contract by invoking the mac. rather, an attempt to invoke the mac would likely involve extended and costly litigation with merrill lynch that, with significant probability, would result in bank of america being required either to pay substantial damages or to acquire a firm whose value would have been greatly reduced or destroyed by a strong negative market reaction to the announcement. for these reasons, i believed that, rather than invoking the mac, bank of america's best option, and the best option for the system, was to work with the federal reserve and the treasury to develop a contingency plan to ensure that the company would remain stable should the completion of the acquisition and the announcement of losses lead to financial stress, particularly a sudden pullback of funding of the type that had been experienced by wachovia, lehman, and other firms. ultimately, on december 30, the bank of america board determined to go forward with the acquisition. the staff of the federal reserve worked diligently with treasury, other regulators, and bank of america to put in place

in february, i expressed the hope that we would complete the volcker rule by the end of this year. since that time, there has been good interagency progress, and i maintain both the hope and expectation of five months ago. the derivatives push - out provision in section 716 of the dodd - frank act generally prohibits the provision of federal assistance, such as fdic deposit insurance or federal reserve discount window credit, to swap dealers and major swap participants. the provision becomes effective on july 16, 2013, although the statute provides insured depository institutions the right to request a two - year extension from their primary federal supervisor. last month, the federal reserve issued an interim final rule that clarified that uninsured u. s. branches and agencies of foreign banks will be treated in the same manner as insured depository institutions under section 716 and, as a result, will qualify for the same exemptions and two - year transition period available by statute to u. s. insured depository institutions. the interim final rule also establishes the process for state member banks and uninsured state branches or agencies of foreign banks to apply to the federal reserve for transition relief. 4 although the rule is already effective, we are seeking comments on it and will revise the rule, as necessary, in light of comments received. oversight of community banks in addition to overseeing large banking firms, the federal reserve supervises approximately 800 state - chartered community banks that are members of the federal reserve system. 5 community banks play an important role in extending credit in local economies across the country – particularly, though by no means only, in their lending to small and medium - sized businesses. recognizing the disproportionate burden that regulatory compliance can impose on smaller institutions, the federal reserve has put in place special processes for taking account of the circumstances and more limited compliance resources of community banks, while still achieving safety - and - soundness aims. we created a special subcommittee of our regulatory and supervisory oversight committee to review all proposals with an eye to their effects on community banks. we have also established a community depository institutions advisory council to enable community bankers to comment on the economy, lending conditions, supervisory policies, and other matters of interest. the changes we will be seeing in the financial regulatory architecture as a result of the doddfrank act and basel iii are principally directed at our largest and most complex financial firms. many of the basel iii requirements will not apply to smaller banks – including the countercy