, known as basel ii, the federal banking agencies are taking a comprehensive look at additional possible changes to existing regulatory capital guidelines for banks that would not adopt the proposed basel ii revisions. these possible changes to basel i would seek to increase the risk sensitivity of the framework and to help mitigate any competitive inequities that could result from the implementation of basel ii. the recent update to the cra regulations provides another example in which regulators have taken into account the special features of community banks. last year, the federal reserve and other federal agencies issued final cra rules that reduced compliance burden by creating a new category of intermediate small banks with assets between $ 250 million and $ 1 billion. banks in this new category now face reduced requirements for data collection and reporting, and they have become eligible for a two - pronged set of cra tests - - a streamlined lending test and a community development test - - rather than the three - part cra criteria that larger banks must meet. these changes are intended to reduce the costs borne by smaller banks and to increase flexibility while still achieving the community development objectives of cra. to target examination resources and to limit the burden of on - site reviews, the federal reserve also has increasingly relied on automated off - site monitoring tools. for example, since the late 1990s, the federal reserve has supervised many small bank holding companies using an off - site review program. we support this program with a targeted monitoring system that seeks to identify parent company and nonbank issues that may adversely affect affiliated insured depository institutions. this program enables us to limit on - site reviews to those bank holding companies with characteristics that could pose risks to insured depositories. we also use statistical models to monitor the condition of state member banks and quickly address any issues that emerge between regularly scheduled on - site examinations. this year, we substantially updated these models to improve their performance. thanks in large part to such efforts, examiners today conduct more of their supervisory activities offsite, helping to reduce the burden that is associated with on - site examinations at institutions like yours. beyond these changes, the federal reserve is participating in an ongoing interagency review of banking regulations pursuant to the economic growth and regulatory paperwork reduction act, known as egrpra. this review seeks to identify opportunities to streamline regulatory procedures and requirements when such changes would be consistent with maintaining bank safety and soundness. the board has also supported various legislative changes that would ease regulatory burden. these include a recently proposed change

that would permit supervisors to extend the time between on - site examinations to eighteen months for well - managed and well - capitalized banks with up to $ 500 million in assets. this change would double the current size threshold and has the potential to allow roughly 1, 200 more community institutions to qualify for the extended examination cycle. in my remaining time, i would like to discuss some of the key financial and risk - management challenges that we have identified through our supervisory activities. banking has always been a business of taking and managing risks, but evolving market and economic conditions affect the types of opportunities available. in recent years, community banks have become more focused on commercial real estate lending, leading to a significant shift in the balance sheet and risk profiles of growing numbers of banks. in most local markets, commercial real estate loans have performed well. our examiners tell us that lending standards are generally sound and are not comparable to the standards that contributed to broad problems in the banking industry two decades ago. in particular, real estate appraisal practices have improved. however, more recently, there have been signs of some easing of underwriting standards. the rapid growth in commercial real estate exposures relative to capital and assets raises the possibility that risk - management practices in community banks may not have kept pace with growing concentrations and may be due for upgrades in oversight, policies, information systems, and stress testing. in response to these developments, the federal banking agencies have recently proposed guidance that would focus examiners'attention on those loans that are particularly vulnerable to adverse market conditions - - that is, loans dependent primarily on the sale, lease, or refinancing of commercial property as the source of repayment. i emphasize that, in proposing this guidance, supervisors are not aiming to discourage banks from making sound loans in commercial real estate or in any other loan category. rather, we are affirming the need for each bank to recognize the risks arising from concentration and to have in place appropriate risk - management practices and capital levels. adjusting to changes in the level of short - term interest rates can also pose challenges to community banks. thus far, the relative stability of community bank net interest margins suggests that they have done a good job of managing their interest rate risk exposure throughout the recent increase in market rates. importantly, most community banks have effectively controlled the maturity distributions of their assets and made significant improvements over the past decade to their management and measurement of interest rate risk. certainly, the procedures employed by community banks today are significantly more