( iosco ) revisions to the 1996 market risk amendment ( mra ). since adoption of the mra, banks'trading activities have become more sophisticated and have given rise to a wider range of risks that are not easily captured in the existing value - at - risk ( var ) models used in many banks. for example, banks are now including more products related to credit risk, such as credit - default swaps and tranches of collateralized debt obligations, in their trading books. these products can create default risks that are not captured well by the methodologies required under the current mra rule – which specifies a ten - day holding period and a 99 percent confidence interval – thereby creating potential arbitrage opportunities between the banking book and the trading book. recent events relating to us basel ii implementation as most of you know, there have been two important recent events related to basel ii implementation in the united states, both of which occurred on february 15. the first was the release of a report by the government accountability office ( gao ) on u. s. implementation of basel ii. the second was issuance of proposed basel ii supervisory guidance by the u. s. banking agencies. gao study the federal reserve welcomes the recent gao report on basel ii implementation in the united states. we believe this report will help move the u. s. basel ii process forward. while i do not intend to summarize the gao report here, i would like to offer a few thoughts on the report's conclusions. the federal reserve concurs with the report's finding that the basel i capital rule is particularly inadequate for large banking organizations ; the report states that the agencies should continue their efforts to finalize the u. s. basel ii capital rule and proceed with the parallel run and transition period to basel ii. we agree with the report's conclusion that finalizing the u. s. basel ii rule would generate crucial information to enable the agencies to make future assessments of the strengths and weaknesses of the basel ii rule for the u. s. banking system. we also agree with the gao's finding that establishing basel - ii transitional floors will prevent a bank's regulatory capital requirements from declining precipitously during the transition period. and finally, we agree with the gao that any further delay in the u. s. implementation of basel ii creates potential competitive disadvantages for u. s. banks when they are compared with foreign banks. the gao report also raised issues about transparency and

independence can be misunderstood, its defense misconstrued, its threats dismissed, and the consequences of its breach underestimated. in the balance of my remarks, i will discuss these issues. central bank actions at the water ’ s edge the congress is currently immersed in a significant policy debate on the role of the central bank, as part of legislation described by its authors as comprehensive, fundamental regulatory reform. 3 and it is worth remembering that the federal reserve is the nation ’ s third significant experiment with a central bank. 4 as the federal reserve nears its centennial, the fed ’ s longevity should not allow our memories to fail us on its origin and the scope of its remit. let me explain. the grant of authority to the central bank is a considered judgment of the nation ’ s elected representatives. central bankers are entrusted with a revocable privilege. so, declarations of independence by fed policymakers are heartening. but independence is ours to demonstrate, not principally to declare. and central bankers err if they presume that independence is some inalienable right, some entitlement. a misconception on the nature of the central bank ’ s authority gives succor to fed critics. the fed is not independent from government. it is independent within government. and elected representatives have every right to redraw the central bank ’ s authority, even if a fuller reading of economic history considers it unwise. actual inflation in check. see ben s. bernanke ( 2005 ), “ what have we learned since october 1979? ” federal reserve bank of st. louis, review, vol. 87 ( march – april ), part 2, pp. 277 – 82. see kevin warsh ( 2010 ), “ regulation and its discontents ”, speech delivered at the new york association for business economics, new york, february 3. the first bank of the united states was founded in 1791, and its charter expired in 1811. the second bank of the united states was founded in 1816 and lost its public charter in 1836. the federal reserve ’ s defenders also err if they seek to extend the fed ’ s vaunted independence to the full range of its activities. my reading has it that the congress granted the fed independence in the conduct of monetary policy. in my view, no particular deference is owed – no promise of non - intervention due – in the conduct of regulatory policy, consumer protection, or other responsibilities granted to the federal reserve. this