present a reasonably streamlined package for u. s. banks to consider. needless to say, it will also be imperative that the u. s. agencies explain the proposals as clearly as possible in the anpr itself. another aspect of the complexity concern surrounding basel ii is its use of modern risk - management techniques. these techniques inevitably involve complex statistical, and thus mathematical, assessments of risk. to reject such techniques solely because they involve mathematical complexity would be inconsistent with the broader direction that banking and its best - practice risk management have been taking over the past decade. one could not reasonably hope to develop a meaningful or comprehensive assessment of risk at a large, complex bank today without making use of such methods ; and, i might add, this view seems to be supported by most of the documents issued on the matter by the rma. but some of the concern over complexity is driven by the fact that basel ii makes a number of distinctions between exposures and transactions in an effort to improve the risk sensitivity of the resulting capital ratios. reasonable people might disagree about these particular tradeoffs between complexity and risk - sensitivity that have been chosen by the basel committee. comments and feedback on these tradeoffs will be particularly important. but such comments will be most effective if they address both sides of the question - - not only point out areas in which the proposal may be overly complex but also show how the objective of risk sensitivity could be met in less complex ways or state why it may not be necessary to achieve either flexibility or greater risk sensitivity in this particular instance. competitive equity is a second fundamental area that i hope the comment process will address. the question of competitive equity has domestic aspects, international aspects, and bank - nonbank aspects. let me start with this last aspect, namely whether the basel ii proposals will impose restraints on banks that are not being imposed on their nonbank competitors. it is important that we receive information on the competitive impact of the basel ii proposals relative to nonbank competitors, particularly if it appears that the marketplace allows nonbanks to operate with less capital - - or conversely with more leverage - - than similarly situated banks would be required to hold. clearly, we should not hinder the competitive position of any u. s. banking organization relative to nonbanks and will work to avoid such an outcome. however, bank supervisors also have an obligation to develop the regulations that they feel are appropriate to banks even if similar regulations will not be applied to nonbank competitors. all of you are thoroughly familiar

with the elements of the federal safety net - - including deposit insurance and access to the discount window and the payment system - that differentiate banks from nonbanks in the united states. the safety net, which is provided at taxpayer expense, obligates supervisors to develop approaches that they believe are prudent for the banks that benefit from that safety net. a second aspect of the competitive equity issue involves domestic competition among banks - - what would be the competitive effect of altering the regulatory capital rules for the largest and most complex banks while keeping the existing framework for most other banks? my perception is that pricing, and thus competition, between large and smaller banks today is relatively little influenced by regulatory capital constraints because banks are operating far above regulatory minimum levels, or because economic capital and not regulatory capital is the binding constraint, or because banks are capable of easily selling or securitizing the exposure, as is the case with the majority of residential mortgage loans. moreover, the ultimate check on the possibility of competitive distortion is that any bank that makes the investment in risk management technology necessary to meet the basel ii standards will be able to adopt the advanced irb approach. i hope that it goes without saying that in proposing to implement basel ii as we have outlined, we are not seeking or expecting to induce material shifts in the competitive banking landscape in the united states. nevertheless, if some institutions believe that these proposals will have such an effect, we want them to use the anpr comment process to enable us to understand and evaluate the rationale for those views and whether modifications to the basel ii proposals, or the way we intend to implement them, are appropriate in response. another important aspect of the competitive equity issue is competition among the subset of banks covered by the basel ii approaches, particularly the more advanced approaches. as a result of relying on inputs generated by systems at individual banks, there will inherently be variations across these banks in how such systems treat the same transactions and exposures. a certain amount of such variation is clearly a necessary byproduct of the need to provide the flexibility to make use of internally generated data. but there is also a strong policy interest in ensuring comparability across banks, as i have already discussed. this policy interest is one reason why it is desirable to establish minimum qualifying criteria for the use of approaches that rely on internally generated data, whether they might be the advanced irb approach for credit risk or the advanced measurement approach ( ama ) for operational risk. on the other hand,