npr. in most areas of risk management, it is our intention to have institutions retain their ability to choose which specific methods they employ. in other words, the guidance identifies an acceptable range of practice for banks. within this range, a bank could use several types of approaches and methodologies. the proposed guidance offers some concrete examples of different approaches that might be considered acceptable practices. in addition to supervisory guidance on requirements for institutions using regulatory risk - based capital requirements ( pillar 1 ), the agencies issued proposed guidance relating to supervisory review of capital adequacy ( pillar 2 ). although this is the first guidance on pillar 2 issued by the u. s. agencies, the supervisory review process described in the guidance is a continuation of the agencies'long - standing approach to bank supervision. however, some aspects of existing supervisory practices are being augmented or more clearly defined to support the proposed basel ii framework. probably the most noteworthy change is a specific requirement, outlined in the npr, for banks to develop an internal capital adequacy assessment process ( icaap ). the proposed guidance offers additional detail about the icaap, but in short, the icaap should identify and measure material risks, set capital goals that relate to risks, and provide governance and controls to ensure that internal capital assessments are subject to proper oversight. the icaap requirement is intended to underscore the agencies'existing view that the primary responsibility for assessing capital adequacy lies with banks. supervisors are responsible for evaluating bank assessments of capital adequacy and for ensuring that the processes for developing those assessments are robust and satisfactory. notably, the proposed icaap requirement is consistent with existing federal reserve supervisory guidance as reflected in supervision and regulation letter 99 - 18. the agencies believe that the proposed supervisory guidance documents are a necessary supplement to the basel ii npr. the guidance includes standards to promote safety and soundness and to encourage the comparability of regulatory capital measures across banks. during the qualification process, a bank's primary federal supervisor will review the bank's risk - measurement and – management framework relative to the qualification requirements in order to determine whether the bank may apply the advanced approaches to calculate minimum regulatory capital. the proposed supervisory guidance documents are companion guidance to the basel ii npr ; therefore, they do not address any public comments received since the npr was issued. the guidance provides additional information that should help banks satisfy the npr's qualification requirements. importantly, the publication of these guidance documents for comment

institutions have concerns, which they have expressed in formal comment letters, about areas in which the basel ii npr diverges from the basel ii 2004 mid - year text. some of their specific concerns relate to proposed safeguards in the basel ii npr that go beyond those in the mid - year text, including the effect on risk sensitivity that may result from the proposed limit on declines in aggregate capital. the proposed definition of default and treatment of downturn lgds ( loss given default ) are also areas that have received attention from commenters. additionally, there has been some concern expressed about retention of the existing leverage ratio. the u. s. agencies remain sensitive to these and other issues raised by commenters so far, including the overall burden and costs associated with the current proposals, as well as any potential competitive effects that may arise. once we have received all comments on the proposals, we intend to review all comments carefully to assess what is the best way forward. the federal reserve hopes that everyone who reviews the proposals understands that they are intended to promote the stability of the u. s. financial system by ensuring the safety and soundness of the largest u. s. banks. thus, as chairman bernanke has noted, the ability of basel ii to promote safety and soundness is the first criterion by which these regulatory capital proposals should be judged. proposed revisions to the market - risk rule as you are likely aware, the federal reserve, the office of the comptroller of the currency, and the federal deposit insurance corporation also have issued an npr to amend their market - risk capital rules. the proposed amendments would implement changes to the market risk amendment that were adopted by the basel committee and iosco in 2005. the office of thrift supervision joined in the npr and, when the rules are finalized, will be implementing a market - risk capital rule for the first time. the comment period on the market - risk npr recently ended, and the agencies are reviewing the comments received in preparation for interagency discussions on the final rule. the current marketrisk rule uses a principles - based approach to market - risk capital regulation. in crafting the market - risk npr, the agencies strived to continue the existing principles - based approach by avoiding highly prescriptive rule proposals. some comments received to date indicate that in certain areas we could be even less prescriptive and in other areas the comments ask for more clarity or specifics. we will consider all comments carefully in trying to reach a balance