agencies propose that only the most advanced approaches under basel ii be offered for banking organizations in the united states : the advanced internal ratings - based approach for credit risk, known as a - irb, and the advanced measurement approach for operational risk, known as ama. as indicated in the anpr, the standardized approach and the foundation irb approach to basel ii would not be permitted for credit risk. nor would the basic indicator approach or standardized approach be available for operational risk. the banking agencies took considerable time to develop the advanced proposals, which we believed would clearly be the best option for the u. s. banking system. the complex operations of the largest banks have outgrown the existing capital regime, and for them basel i has become less and less effective. indeed, in the view of u. s. supervisors, an overhaul of the regulatory capital system for our largest banks would be worthwhile only if the most advanced approaches were used. because of the heterogeneous nature of the u. s. banking system, some balance in the application of basel ii would be necessary. on the one hand, the size, scale and complexity of the internationally active u. s. banks requires, in the opinion of the u. s. supervisors, that these entities operate with the best feasible risk measurement and management procedures, and these procedures are most consistent with the advanced versions of basel ii. on the other hand, the u. s. agencies do not want to impose the higher costs of the advanced version of basel ii on institutions for which it is clearly not suited. in the end, the u. s. banking agencies tried to allow as much choice as possible, while ensuring that banks are still meeting domestic regulatory obligations, avoiding private - sector costs that do not produce some clear and convincing level of benefits, abiding by the evolving basel ii agreement, and, most important, maintaining a safe and sound u. s. banking system. the u. s. banks that would be required to adopt basel ii, as well as those that we expect to choose or opt in to the new regulatory capital rules, are those that, because of size and complexity, should operate with the most sophisticated risk - management practices. the anpr lays out objective criteria, including asset size and foreign exposure, to identify the large, internationally active banks that would be considered mandatory banks. naturally, there are also thousands of banks in the united states that do not qualify as large and internationally active and for which the advanced

s. regulators appreciate the fact that we are able to operate as independent agencies but also realize that we have an obligation to keep the elected representatives informed of our progress in this major effort. of course, it is expected that other countries and the european union will be following their own procedures as well. overall, i have been impressed by the efficacy of the comment process and believe it offers an open forum for all parties to voice their opinions. debate and discussion on such an important undertaking are essential, and - if solid and convincing arguments are put forth - provide a real opportunity for enhancements to the final product. the current proposal is better because the comments have elicited good ideas that have been taken seriously. future comments based on sound thought and evidence will create further modifications. but i must say that simple assertions will not carry very much weight. at the same time, we do need to ensure that momentum is maintained. in october, the committee members committed to work promptly to resolve outstanding issues by mid - 2004. in january, the basel committee will meet to address further analysis of outstanding issues and review the timetable for completing and implementing the committee ’ s work on the accord. using the agreement reached in the committee as a template, u. s. supervisors then plan to conduct another quantitative impact study ( qis ) to gauge more clearly the impact of the basel proposals. we believe it is critical that we carefully test the new proposal to determine its effects on individual institutions and to ascertain the need to fine - tune the proposal further, a process that could include recalibrating some of the risk - weight functions. it is our sense that other countries will be doing the same. because timing is a function of the degree of changes required by the qis, the u. s. agencies will then conduct a full notice of proposed rulemaking once again to seek and then evaluate public comments before adopting a final rule. u. s. proposals for basel ii against that background, let me turn to a number of topics that some have raised about basel ii. the u. s. banking agencies have, as you know, proposed to implement basel ii somewhat differently than other nations have. these differences are perfectly consistent with the spirit and letter of the proposal, and reflect the particular characteristics of the u. s. banking system and the rules and regulations under which it operates. while our approach is best for the united states, it is not necessarily best for other nations. the u. s. banking