susan schmidt bies : basel ii and commercial real estate testimony of ms susan schmidt bies, member of the board of governors of the us federal reserve system, before the subcommittee on financial institutions and consumer credit, committee on financial services, us house of representatives, washington, dc, 14 september 2006. * * * chairman bachus, representative sanders, and members of the subcommittee on financial institutions and consumer credit, i thank you for the opportunity to discuss the developments relating to bank regulatory capital requirements in the united states, including the u. s. implementation of basel ii and updates to regulatory capital rules for market risk, as well as the regulatory agencies'proposed guidance on commercial real estate ( cre ) concentration risk. developments related to regulatory capital requirements in the united states as subcommittee members may know, last week there were some very positive developments in the process to revise regulatory capital requirements for large, internationally active u. s. banking institutions. first, the federal deposit insurance corporation board approved the basel ii notice of proposed rulemaking ( npr ) on the advanced capital adequacy framework, commonly referred to as basel ii. at the same time, the fdic board approved an npr that would update the u. s. regulatory capital rules for market risk exposures. the office of the comptroller of the currency and the office of thrift supervision took similar actions on the same day. together with the federal reserve's approval of the draft basel ii npr in march and the market risk npr in august, these steps complete all necessary approvals for the two nprs to be published in the federal register for formal public comment. proposed templates for regulatory reporting requirements associated with the two nprs will be published in the federal register for comment at the same time. regarding market risk exposures, that npr is based on a set of revisions developed jointly by the basel committee and the international organization of securities commissions ( iosco ) in 2005 to update the market risk amendment ( mra ), developed a decade ago by the basel committee. these amendments would apply to any banking organization that has significant trading book activity, whether it stays on basel i or moves to basel ii in the united states. the market risk npr is intended to improve the risk sensitivity of the market risk capital framework. further, it will serve to level the playing field between u. s. banking organizations and securities firms that are subject to similar capital requirements. moving to the main focus of today's hearing, the basel ii framework

interest on excess reserves held in bankers'banks on a pass - through basis. so i hope that from these examples you see that the interests of community banks have been considered in many aspects of the government's effort to return financial stability. federal reserve initiatives to promote the strength of minority depository institutions recently, the markets have shown signs of modest improvement, suggesting that government support of the financial system is having a positive effect. but the effects of the current recession continue to be seen in the financial performance of banks of all sizes and types. indeed, some banks have not yet made their way across the " bridge to stabilization " that serves as a theme for this conference. like their competitors, minority depository institutions have weakened in the current environment. for example, for the full year 2008, 43 percent of the 217 minority depository institutions reported a loss, resulting in an aggregate return on assets of negative 0. 16 percent. as with other banks, much of this deterioration stemmed from higher loan loss provisions, expanded noninterest expenses, and tighter net interest margins. loan delinquencies also rose for these institutions, producing an average ratio of noncurrent loans to total loans of more than 3 percent. however, despite these pressures, minority depository institutions generally maintained sound capital positions at the end of the first quarter, with a 10. 5 percent average tier 1 leverage ratio, tier 1 risk - based capital of 14. 2 percent, and total risk - based capital ratio of 15. 4 percent. the average reserve for loan losses reached 1. 7 percent of total loans. additional peer group statistics are available on the federal reserve's partnership for progress website at www. fedpartnership. gov. partnership for progress is a federal reserve initiative launched last year in recognition of the importance of healthy minority depository institutions to the overall strength of communities in this country. the program seeks to promote the soundness and success of your institutions by increasing the level of technical assistance and support that we provide to minority depository institutions and de novo banks. since the program was started, management of several state member banks and bank holding companies have contacted the reserve banks directly to provide helpful feedback and suggestions. as part of the partnership for progress program, we have assigned dedicated contacts in each federal reserve district to work with minority - owned and de novo institutions. mike collins, the executive vice president in charge of supervision at the federal reserve bank of philadelphia, who spoke with you yesterday, chairs the program on