randall s kroszner : risk management and basel ii speech by mr randall s kroszner, member of the board of governors of the us federal reserve system, at the federal reserve bank of boston ama conference, boston, 14 may 2008. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * i am delighted to be here today at this impressive conference. i thank my hosts, president rosengren and his staff at the federal reserve bank of boston, for the invitation. i also thank president rosengren for providing such interesting and informative introductory remarks. over the next two days, you will be having a number of discussions on specific aspects of operational risk and the advanced measurements approaches ( ama ) for calculating riskbased capital requirements under basel ii. therefore, i can probably best contribute to this conference by offering a broader perspective about risk management and basel ii, using examples from the field of operational risk management. i will discuss the implementation of basel ii, including enhancements to the framework being undertaken by the basel committee on banking supervision in light of recent market events, as well as a proposal to implement in the united states a less complex version of the basel ii framework, known as the standardized approach. background i believe focusing on risk management today is certainly topical, given some of the risk management challenges that financial institutions have faced over the past year. recent market events have shown that a number of institutions have not maintained satisfactory risk management practices ; however, we also can point to many examples of sound risk management practices during the recent disruptions. 1 individual institutions are responsible for maintaining sound risk management practices. but supervisors, of course, also have a role to play both in promoting effective risk management and offering incentives for bankers to make improvements to their practices. there are a number of methods supervisors use to that end – some informal, some formal – including speeches, one - on - one discussions, supervisory guidance, onsite examinations, formal supervisory actions, and regulations. one substantial initiative that seeks to improve risk management practices at banking organizations is basel ii. importance of basel ii as you all know, banking activities must be supported by both sound risk management and strong capital levels. for example, even where robust internal controls are in place, the potential for losses from fraud can never be fully eliminated, meaning that institutions need to hold sufficient capital to offset unexpected losses. determining the right level of capital to hold for fraud

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