##4 were not based on fully developed systems or full supervisory guidance. rather, it was conducted on a " best - efforts basis " to provide a snapshot for gauging progress toward implementation of basel ii and to give the u. s. agencies a better sense of how to structure the npr. one of the key areas in the npr influenced by qis4 pertains to banks'estimates of loss given default ( lgd ). qis4 results showed that, in general, data histories were not long enough to capture weaker parts of the economic cycle, especially for lgds, which must reflect downturn conditions. as a result, the agencies have provided a supervisory mapping function for those institutions unable to estimate downturn lgds. the mapping function takes average lgds and " stresses " them to generate an input to the capital calculation that is better suited to the basel ii formulas and produces a more appropriate capital requirement. the federal reserve believes this supervisory mapping function is a necessary component of basel ii because it appears difficult for some banks to produce internal estimates of lgd that are sufficient for risk - based capital purposes. i hope it is clear from the npr and other statements made by the agencies that we are committed to ongoing, detailed analysis to ensure that u. s. implementation of basel ii achieves a strong and risksensitive base of minimum regulatory capital. we need to ensure that the items we identified as incomplete in qis4 are appropriately addressed, and we also need to ensure that additional areas will not inadvertently lower capital levels. we intend to conduct thorough analysis of each institution's basel ii capital results and the impact on aggregate capital in the u. s. banking system at many stages along the way. in addition, 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. there will be no " free pass " or " safe harbor " for any institution, regardless of portfolio composition or business activity. in other words, we plan to have very high standards for basel ii qualification requirements. for instance, a bank will be able to move from the parallel run to live capital calculations with a 95 percent floor only after its primary supervisor has given it permission to do so after having thoroughly evaluated its risk - management methodologies and its ability to calculate minimum regulatory capital using the new framework. similarly, a bank will need approval to move to each of the other two

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