of the transaction itself. the statute instead distinguishes between these activities by looking to the purpose of the trade and the intent of the trader. these subjective characteristics can be difficult to discern in practice, particularly in the context of complex global trading markets in which a firm may engage in thousands or more transactions per day. a similar challenge attaches to efforts to distinguish a hedging trade from a proprietary trade. implementation framework the agencies have proposed a framework for implementation of the volcker rule that combines : 1 ) an explanation of the factors the agencies expect to use to differentiate prohibited activities from permitted activities, 2 ) a requirement that banking entities with significant trading activities implement a program to monitor their activities to ensure compliance with the statute, and 3 ) data collection and reporting requirements, to facilitate both compliance monitoring and the development of more specific guidance over time. in addition, the agencies will use their supervisory and examination processes to monitor compliance with the statute. the third element of the interagency proposal bears some additional comment. in order to help differentiate between permitted market - making activities and prohibited proprietary trading activities, the agencies have proposed to collect data from trading firms on a number of quantitative measurements. these metrics are designed to assist both the agencies and banking entities in identifying the risks and characteristics of prohibited proprietary trading and exempt activities. the proposal makes clear that metrics would be used as a tool, but not as a dispositive factor for defining permissible activities. the agencies instead propose to use metrics to identify activity that merits special scrutiny by banking entities and examiners in their evaluation of the activities of firms. the proposed rule does not include specific thresholds to trigger further scrutiny for individual metrics, but requests comment on whether thresholds would be useful, and notes that the agencies expect to propose them in the future. the proposal also makes clear that the agencies expect to take a heuristic approach to metrics, revising and refining them over time as greater experience is gained in reviewing, analyzing, and applying these measurements for purposes of identifying prohibited proprietary trading. additionally, since some banking entities engage in few or no activities covered by the statute, the proposal also includes a number of elements intended to reduce the burden of the proposed rule on smaller, less - complex banking entities. in particular, the agencies have proposed very limited compliance programs and have reduced or eliminated the data collection requirements for these banking entities. potential effects of the proposal the proprietary trading prohibition in the volcker rule statute itself will undoubtedly affect the

of all mortgages outstanding, have climbed sharply in recent months. the flattening in home prices has contributed to the increase in delinquencies by making refinancing more difficult for borrowers with little home equity. in addition, a large increase in early defaults on recently originated subprime variable - rate mortgages casts serious doubt on the adequacy of the underwriting standards for these products, especially those originated over the past year or so. as a result of this deterioration in loan performance, investors have increased their scrutiny of the credit quality of securitized mortgages, and lenders in turn are evidently tightening the terms and standards applied in the subprime mortgage market. although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. the ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. at this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. in particular, mortgages to prime borrowers and fixed - rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. we will continue to monitor this situation closely. business spending has also slowed recently. expenditures on capital equipment declined in the fourth quarter of 2006 and early this year. much of the weakness in recent months has been in types of capital goods used heavily by the construction and motor vehicle industries, but we have seen some softening in the demand for other types of capital goods as well. although some of this pullback can be explained by the recent moderation in the growth of output, the magnitude of the slowdown has been somewhat greater than would be expected given the normal evolution of the business cycle. in addition, inventory levels in some industries – again, most notably in industries linked to construction and motor vehicle production – rose over the course of last year, leading some firms to cut production to better align inventories with sales. recent indicators suggest that the inventory adjustment process may have largely run its course in the motor vehicle sector, but remaining imbalances in some other industries may continue to impose some restraint on industrial production for a time. despite the recent weak readings, we expect business investment in