the qis4 exercise was conducted on a best - efforts basis without close supervisory oversight. it was just one step in a progression of events leading to adoption of the basel ii framework. it is certainly the case that as we move closer to implementation, supervisory oversight of the basel ii implementation methodologies by our examination teams would increase. indeed, during the qualification process, we expect to have several additional opportunities to evaluate institutions ’ risk - management processes, models, and estimates - - and provide feedback to the institutions on their progress. so while the qis4 results clearly provided a much better sense than before of the progress in implementing basel ii and offered additional insights about the link between risks and capital, qis4 should not be considered a complete forecast of basel ii ’ s ultimate effects. it was a point - in - time look at how the u. s. implementation was progressing. trading book risks in discussions about basel ii, not as much attention has been given to the addendum issued earlier this year by the basel committee, which includes rules to strengthen the capital regime for banks ’ trading activities. the existing capital regime for trading activities was formulated in 1996 and set forth an internal value at risk ( or var ) approach for measuring trading exposures. it was recognized at the time that var models may not adequately capture certain risks, or may not accurately account for socalled “ fat tails ”. for that reason, supervisors subjected banks ’ var results to a multiplier to arrive at a more substantial capital charge. during the past decade, a number of changes have taken place in the composition of banks ’ trading books that have led supervisors to question whether the 1996 capital regime remains appropriate. trading books today include many more credit - related products, as well as other structured and exotic products, that are far less liquid than the products for which the 1996 regime was designed. these new products also give rise to new types of risk that the capital regime did not contemplate or capture. moreover, supervisors were concerned that this increase in credit and liquidity risk in the trading book would accelerate as accounting standards move more and more to the use of fair value and as basel ii removes the eight - percent cap on banking book regulatory capital charges, giving banks an incentive to move their highest risk banking book positions to the trading book. to address these issues, the june 2005 basel paper set forth a number of improvements to the trading book regulatory capital regime including : a requirement that banks have policies and procedures for determining

susan schmidt bies : recent developments in regulatory capital remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the standard & poor ’ s north american financial institutions conference, new york, 30 november 2005. * * * i would like to thank standard and poor ’ s for the invitation to speak here today. as i look at the topics on the agenda, i am struck by how similar the regulatory capital framework is to the corporate and bond rating approaches to capital that you are discussing. in fact, one of the continuing challenges financial officers face is relating the different levels of capital that regulators and business strategy require. regulators focus on improving measures of risk exposures to determine minimum regulatory capital. that is, we are focused on setting a level of capital at individual banks that is sufficient for safety and soundness in the financial system. successful individual financial institutions, on the other hand, generally strive for a higher level of capital to effectively implement their strategies. this higher level of capital demonstrates financial strength to the market, which is reflected in their credit ratings and allows them to access funding and capital at attractive interest rates. the higher capital level also supports business strategies by helping firms to retain and grow their customer base, and by providing a capital cushion that allows them to respond to new business opportunities on a timely basis. conferences such as this help us to share evolving best practices in determining appropriate target capital levels from these different perspectives. it is the continuing focus of relating capital to risk measurement and modeling, including the wider scope of risk types that can be measured, that provides a common framework to relate economic, market, and minimum regulatory capital. recent developments in regulatory capital in my remarks today, i am going to focus on minimum regulatory capital. as you likely know, the past two months have been somewhat eventful in the arena of regulatory capital rules, which normally does not move at the speed of light. first, on september 30, the u. s. banking agencies announced their revised plans for moving forward with basel ii, which in the united states is expected to apply to only a small set of large, internationally active organizations. second, the u. s. banking agencies decided to publish an advance notice of proposed rulemaking ( anpr ) to revise our existing risk - based capital standards, known as basel i, which would apply to the vast majority of u. s. institutions. we hope that the next few months will be a period of interaction and discussion