that they regulate. challenge of protection while the agencies and financial - sector participants are working to improve their operational resilience, some vulnerabilities continue to pose challenges. the strategy underlying the sound practices is to increase the likelihood that systemically critical institutions will be able to recover rapidly from a wide - scale disruption. however, the sound practices address only recovery, not the prevention of an attack. the agencies are addressing this concern by working to improve coordination and emergency planning efforts between federal, state, and local homeland security authorities ; the various federal, state, and local protection agencies ; and the systemically critical institutions. efforts have focused on the locations where the systemically critical institutions have their primary operations - including new york city. the agencies also plan to work with local protection agencies in cities where critical institutions are locating backup sites. as part of these efforts, the department of the treasury has arranged for site surveys of key financial - services sector assets to determine whether physical security can be hardened. protection plans have been developed and are being implemented. importance of telecommunications to the financial services sector the resilience of the telecommunications infrastructure is, from our perspective, one of the most important national issues involving the nation ’ s critical infrastructure. the u. s. financial system depends on telecommunications to effect transactions and make payments. following september 11, the federal reserve and the fbiic agencies expanded and promoted the use of national security / emergency preparedness ( ns / ep ) telecommunications programs sponsored by ncs. these programs worked well in helping to resume operations on september 11. the federal reserve is working with fbiic agencies through outreach to expand ncs services to clearing and settlement organizations processing securities. approximately 5, 000 additional authorizations to ensure the priority of voice telecommunications have been issued in the financial sector. moreover, about 4, 100 critical circuits used to transmit financial data have been registered for priority restoration and provisioning of new lines ; these include most circuits between the payment and settlement systems, the markets, and key market participants. the national security / emergency preparedness telecommunications program operated by the ncs currently focuses on recovery and restoration. the fbiic agencies believe that a third aspect protection - through establishment of a national program for maintaining physically diverse circuits and switches, should be incorporated into the program. treasury has designated the federal reserve as the lead agency for telecommunications for the fbiic interdependencies study. at the federal reserve ’ s request, the telecommunications sector through the national security telecommunications advisory committee ( nstac

for community banks. market discipline ( pillar 3 ), however, may be particularly problematic for community banks, since such institutions are often closely held and not rigorously and continuously evaluated by market analysts and investors. even if they are traded on a regional basis, the depth of the trading is likely to be inadequate to provide timely signals to supervisors and discipline to management. so, though pillar 3 is not irrelevant for community banks, it is unlikely to be as effective as it is for large, complex banks. multilayered approach. as i have noted, the proposed basel capital standard is highly complex, but for good reason. the proposal contains overlapping options that offer several approaches to accommodate banks with varied resources, expertise, and risk profiles. the question is whether the differentiation goes far enough for the u. s. banking structure. the most basic approach under the proposed accord is the so - called standardized method. the standardized approach is conceptually the same as the current capital accord, but more risk - sensitive in some respects. under all the basel approaches, a bank, as now, would allocate a risk - weight to each of its assets and off - balance - sheet positions and calculate a sum of the risk - weighted asset values. the capital requirement remains 8 percent of the institution's risk - weighted assets. the primary change, under the standardized approach, would be to base the asset risk - weights for exposures to sovereigns, other banks, and corporations on the borrower's external credit ratings, when possible. the proposal would also give more recognition to a bank's efforts to mitigate risk through guarantees, collateral, credit derivatives, and netting agreements. those changes may be attractive to many institutions ; however, the clear focus of the new basel proposal is the basing of regulatory capital requirements on a bank's own internal credit ratings, the so - called internal rating based or irb approach. there are two variants of the irb approach : the " foundation " and " advanced " options. both were designed for banks with the resources and expertise to build and maintain sophisticated risk - management systems and for which the current capital standard more seriously mismeasures risk. the difference between the two irb methods is that the foundation approach is designed for banks with systems that do not permit full reliance on internal risk estimates for calculating capital requirements. under the foundation approach, missing risk parameters would be supplied by the supervisor and would be set conservatively. if banks believe these conservative estimates are