or relying on market discipline. and market discipline is impossible if counterparties ( and rating agencies ) do not have better information about banks'risk positions. markets need accurate information to function effectively. the objective is not to supplant supervision of our larger organizations but to provide information that will enable market participants to serve as an effective complement to supervisors. i would also like to underscore that basel ii is indeed a seminal step in the development of regulatory capital requirements. it is not necessarily the endpoint, but it does represent a substantial step forward - one that we believe will remain in place for many years to come. implementation efforts in the united states i would now like to address some of the practical aspects of the implementation of basel ii in the united states. i assume that most of you either heard, or read about the testimony and discussion at last week's hearing before two subcommittees of the house committee on financial services. i will not attempt to paraphrase my colleagues'statements, but i will point out that throughout this process the agencies have stressed the importance of comments from the congress, the banking industry, and other interested parties. the agencies'reaction to the results of the fourth quantitative impact study - known as qis4 - shows how seriously we are taking basel ii implementation. the interagency statement issued on april 29 indicated clearly, i believe, that results from qis4 were more widely dispersed and showed a larger overall drop in capital than the agencies had expected. this was the impetus for deciding to delay the notice of proposed rulemaking for basel ii. we now have to determine whether these results arose from actual differences in risk among respondents, differences in stages of preparation ( including data limitations ) among respondents, limits of the qis4 exercise, or a possible need for adjustments to the basel framework itself. staff at the agencies are working together to analyze the qis4 results and in some cases are talking to banks about their submissions. analyzing the data used in qis4 is vitally important, because ultimately the success of basel ii will depend on the quantity and quality of data that banks have to use as inputs to the framework. from the federal reserve's perspective, delving into the results of qis4 is an appropriate response by the agencies. but we should also acknowledge that this follow - up work has its limits. we can go only so far with the data given to us. we must recognize that banks - understandably - might not yet have their

mervyn king : monetary policy developments speech by mr mervyn king, governor of the bank of england, to scottish business organisations, edinburgh, 20 october 2009. * * * two years ago scotland was home to two of the largest and most respected international banks. both are now largely state - owned. sir walter scott would have been mortified by these events. writing in 1826, under the pseudonym of malachi malagrowther, he observed that : “ not only did the banks dispersed throughout scotland afford the means of bringing the country to an unexpected and almost marvellous degree of prosperity, but in no considerable instance, save one [ the ayr bank ], have their own over - speculating undertakings been the means of interrupting that prosperity ”. banking has not been good for the wealth of the scottish – and, it should be said, almost any other – nation recently. over the past year, almost six million jobs have been lost in the united states, over 2½ million in the euro area, and over half a million in the united kingdom. our national debt is rising rapidly, not least as the consequence of support to the banking system. we shall all be paying for the impact of this crisis on the public finances for a generation. the united kingdom faces two fundamental long - run challenges. first, to rebalance the economy, with more resources allocated to business investment and net exports and fewer to consumption. that is consistent with the need – now widely accepted – to eliminate the large structural fiscal deficit and to raise the national saving rate. it is part of a need for a wider rebalancing of domestic demand in the world economy away from those countries that borrowed and ran current account deficits towards those that lent and ran surpluses. second, both the structure and regulation of banking in the uk need reform. banks increased both the size and leverage of their balance sheets to levels that threatened stability of the system as a whole. they remain extraordinarily dependent on the public sector for support. that was necessary in the immediate crisis, but is not sustainable in the medium term. these two challenges are interrelated. in creating the crisis, imbalances in the world economy led to unusually low real interest rates and large net capital flows from the emerging market economies to the developed world. that provided the fuel which an inadequately designed regulatory system ignited to produce the financial firestorm that engulfed us all. if our response to the crisis focuses only on the symptoms rather than the underlying