and services. the agencies believe that now is another appropriate time to amend the basel i rules. these proposals to amend basel i, also known as " basel ia, " are still at an early stage. last fall, the u. s. banking agencies issued an advance notice of proposed rulemaking ( anpr ) that outlined suggested basel i changes. in part, these proposed changes are meant to address concerns about the potential adverse competitive effects of basel ii. we take concerns about competitive effects seriously. during the basel i anpr process, we sought input from the industry and other interested parties. the federal reserve has conducted substantial research about the potential effects of basel ii - - published on our web site - - and plans to continue those efforts. in an effort to mitigate 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 will apply. that is, in basel i amendments we are trying to find the right balance between added risk sensitivity and low burden. as you are aware, this is not necessarily the easiest balance to find. for example, there may be a desire to tie regulatory capital measures more closely to risk, but only by expanding the use of factors that determine regulatory risk weights. however, if we expand the number of factors that are used - - for example, loan - to - value measures, credit scores, and external credit ratings - - that will likely increase the burden for calculating regulatory capital. in short, we are faced with a tradeoff. and some of the comment letters received so far address this very point. naturally, institutions differ with respect to this tradeoff, with some wanting greater risk sensitivity at the cost of greater burden, and some wanting just a little more risk sensitivity with little or no additional burden. of course, there are also those that would like much more risk sensitivity with no additional burden, but that just does not seem possible in this case. as we develop the npr for basel i amendments, the agencies will have to analyze very carefully where we want to end up on the risk - sensitivity - versus - burden tradeoff. and of course we expect to solicit comments on that tradeoff. additionally, we recognize the need for full transparency

thorough analyses of each institution's basel ii capital results and basel ii's impact on aggregate minimum required capital in the u. s. banking system. the u. s. regulators are united in their belief that no bank should be permitted to operate under basel ii until it has proven itself ready to do so. in other words, we plan to have very high standards for basel ii qualification. for instance, a bank will be able to move from the parallel run to the first transitional floor period only after its primary supervisor has given it permission to do so - - and only after that supervisor has thoroughly evaluated the bank's risk - management methodologies and its ability to calculate minimum regulatory capital using the new framework. similarly, a bank will only be allowed to move to each successive floor, as well as to the full basel ii minimum capital calculation without floors, upon a finding by the primary supervisor that it is ready, following a rigorous qualification process. to reiterate, during and after the transition to basel ii, supervisors plan to rely on ongoing, detailed analyses to continuously evaluate the results of the new framework and ensure prudent levels of capital. and to be quite clear, the federal reserve believes that strong capital is critical to the health of our banking system. we also believe that basel ii will help us continue to ensure that u. s. banks maintain capital levels that serve as an appropriate cushion against unexpected losses. as we have mentioned before, we will continue to use existing prudential measures to complement basel ii. for example, the current leverage ratio requirement - - a ratio of capital to total assets - - will remain unchanged for all banks, whether or not they are subject to the basel ii framework. also, supervisors will continue to enforce existing prompt - corrective - action rules in response to declines in capital. both the leverage ratio and prompt - corrective - action rules are fully consistent with basel ii. proposals to amend basel i of course, those of you here today have also been following discussions about possible changes - beyond basel ii - - to the existing regulatory capital rules. first of all, we expect only one or two dozen banks to move to basel ii in the near term. the vast majority of u. s. banks would be able to continue operating safely under basel i as amended through the rulemaking process. the basel i framework has already been amended more than twenty - five times in response to changes in the banking environment and a better understanding of the risks of individual products