' additional plans for revising capital rules, specifically plans for those banks not subject to the advanced approaches of basel ii. some commentators on the earlier basel ii and basel ia proposals voiced concerns that adoption of a new capital framework for the largest and most complex u. s. banking organizations could disadvantage other u. s. banking organizations, particularly the smaller banks. we understand that banks not required to adopt basel ii are facing a choice about whether to opt - in to the advanced approaches. some of these banks may be sophisticated institutions that exhibit sound risk management but do not quite meet the criteria to be core banks. the agencies recognize that such institutions should be afforded an alternative for more - risk - sensitive capital requirements, but one that is not as complex as the advanced approaches. in this regard, the agencies have responded by committing to proposing a " standardized " approach instead of basel ia. specifically, the staffs are currently working on a notice of proposed rulemaking that would implement some of the simpler approaches for both credit risk and operational risk from the basel ii framework – referred to as the standardized approach. the proposal is being developed as an optional risk - based capital framework for all banking organizations that are not required to adopt the advanced approaches. we also expect to retain our existing basel i - based regulatory capital framework for those smaller banks that would prefer to remain under that regime. the proposal for the standardized approach will take into consideration relevant commentary received in response to the basel ia and basel ii proposed rules that were published in late 2006 and should, in essence, modernize the basel i - based rules without imposing a substantial implementation burden. among other things, the proposal is being designed both to provide greater differentiation across corporate exposures based on borrowers'underlying credit quality and to recognize a broader spectrum of credit - risk mitigation techniques. the agencies are also considering how to implement pillars 2 and 3 of the basel ii framework in the standardized proposal in a manner that is commensurate with banks'complexity and risk profiles. our goal is to realize the benefits of these two pillars without imposing excessive regulatory burden and without creating competitive advantages or disadvantages for different types of banks. i expect this proposal to be presented to the board for consideration within the next several months, and i encourage all interested parties to review and comment on this proposal once it has been issued. we are keenly aware of the need for capital requirements to make sense from the standpoint of both safety - and - soundness and competitiveness ; we

to hold capital commensurate with the actual risks of such transactions. recent market events highlight why a robust and independent assessment of risk on the part of banks is so important. the enhanced risk - sensitivity of the basel ii advanced approaches creates positive incentives for banks to lend to more - creditworthy counterparties and to lend against good collateral, by requiring banks to hold more capital against higher - risk exposures. the federal reserve's role as the nation's central bank reinforces our belief in the importance of maintaining prudent and risk - sensitive capital requirements for financial institutions. financial stability is enhanced when banks'regulatory capital measures adequately reflect risk, as well as when banks continually improve their risk - management practices. since the basel ii regime is far superior to the current basel i regime in aligning regulatory capital requirements with risk and fostering continual improvements in risk management for our largest and most complex banking organizations, i believe it will contribute to a more resilient financial system as a whole. in addition, let me emphasize that the basel ii regulatory capital framework establishes a more coherent relationship between regulatory measures of capital adequacy and the day - today risk management conducted by banks. that is, it builds on risk - management tools, such as credit - risk rating systems and economic capital, that are already in use at sophisticated financial institutions. as a result, basel ii will be better able than the current system to adapt over time to innovations in banking and financial markets and will reduce incentives for arbitrage that arise from the gap between what the regulators require and what sound economic risk management requires. moving ahead with basel ii implementation next steps for supervisors i used the analogy of running a marathon earlier, describing how the final rule represented a finish line of sorts for the u. s. banking agencies. alas, i'm afraid that we cannot rest because in fact we have simply passed the baton from the runner in the first stage of the race – rule finalization – to the runner in the next stage – implementation. successful implementation of basel ii will require additional hard work and determination. as most of you know, the agencies have for some time been preparing for basel ii implementation by working to integrate basel ii into our day - to - day supervisory processes. with completion of the final rule, we must now be ready to pace ourselves through another long, intensive, but ultimately rewarding, effort. the agencies are already working hard to foster consistency across banks and across the agencies. we are building