banks must develop measures that better account for credit risk under extreme market conditions. this can be achieved through what we call “ stress tests ”, where a bank conducts “ what if ” analyses of how credit exposures to a single counterparty could grow under these market conditions. these might include a large rise or fall in interest rates or a major change in an exchange rate. more rigorous stress testing could have given banks at least some warning of the types of exposures they faced last fall. the critical importance of stress testing is noted very explicitly in our new supervisory guidance. sound practice recommendations in the basle committee report the basle report is accompanied by a sound practices document that sets forth an important set of standards that will guide both banks and their supervisors. among other things, these sound practices call upon banks to : • establish clear policies governing their involvement with hlis ; • adopt credit standards addressing the specific risks associated with hlis ; • establish meaningful measures of potential future exposure ; • establish meaningful credit limits, incorporating the results of stress testing ; and • monitor exposure on a frequent basis. banks generally tightened the credit risk management standards for their hli exposures after the near - collapse of ltcm. however, it is important that supervisors ensure that progress continues. memories tend to be short, and we want to make sure that as markets calm down, as they have in the past months, banks do not return to the old ways of doing business. possible future changes in the capital accord as you know, the basle capital accord is one of the great successes of the basle committee. well before the events of last fall, the basle committee was developing fundamental revisions to the accord to better reflect the many changes in financial markets and risk management practices since the accord ’ s creation in 1988. among the g - 10 supervisors, there is broad agreement that the future accord should make greater distinctions among a bank ’ s credit risks. these discussions are continuing. the strong link between sound risk management practice and the capital accord provides another reason for rapid adoption of the basle committee ’ s sound practices. the hli report raises several important technical issues of relevance to the accord. for example, the committee ’ s call for better measures of potential future exposure may apply to the way such exposures are measured for capital purposes in the accord. other regulatory efforts introduction one of the basle committee ’ s hopes is that its sound practice recommendations will be widely implemented by supervisors both here and overseas. governor meyer and deputy

comptroller brosnan will be discussing in detail the guidance issued by the federal reserve and the occ. i should also note that the new york state banking department recently released a report on banks ’ hedge fund activities that supports the observations and supervisory priorities set forth in the basle committee report. in addition, international supervisory bodies and supervisors from countries outside the u. s. are in the process of acting on many of the proposals discussed here today. actions regarding hedge funds by international groups and individual countries in february, iosco, the international organization of securities commissions, established a task force on hlis. i understand that iosco is focusing on securities firms ’ dealing with hedge funds and the ways in which risk management and market transparency can be improved, which complements the basle committee ’ s work concerning banks. because banks and securities firms are the primary counterparties of hlis, it is crucial that there be a coordinated supervisory response at the international level among securities and bank regulators. at their meeting last month, the group of seven ( g - 7 ) countries issued a statement endorsing both the basle committee and iosco efforts. the g - 7 intends to continue to review the topic of hlis, which will be of assistance as we urge countries to implement sound practices in this area. i would not want to characterize or opine upon the efforts of any one jurisdiction ; many countries ’ efforts, like ours, are underway only recently and need time to develop and take hold. there probably will be differences in the degree to which supervisors in different countries address the questions i have discussed today – if only because the intensity of hli activities varies among countries. but on the whole, i believe that supervisors in major countries will follow up on the recommendations issued by the basle committee. direct versus indirect methods of addressing hli safety and soundness many governments have considered or will consider the advantages and disadvantages of imposing direct regulation on the hli industry. the basle committee report discussed that issue and concluded that concentrating on the behavior of banks and other counterparties doing business with hlis would yield effective and more immediate results. a common element of many hlis is that they are structured in ways that minimize their exposure to supervisory oversight and costs. thus, many have chosen to organize themselves legally in jurisdictions that offer modest supervision and low taxes. am i pleased that so many hlis are organized legally in what many would characterize as tax havens? no. but i do not think