strategies and to choose the most appropriate strategy, given the prevailing market conditions. formal models help firms with larger risk appetites - - in other words, those willing to take on additional risk - - evaluate their capacity to absorb and manage such risks and to take on the risk shifted from others. i contend that firms with larger appetites for risk will be relatively more willing to take on additional risk if they can model and manage it better. without formal risk management, a firm would still be able, in times of high market volatility, to sense that its risk had risen. but it would be uncertain about exactly how the market volatility had affected it. the firm would, in effect, be flying by the seat of its pants. the uncertainty, it seems clear, would lead to less - effective decisionmaking and less ability to transfer risk to someone willing to bear it since others, too, would face the same uncertainty. greater uncertainty would also heighten the potential that markets would simply seize up. though models in general help reduce uncertainty and increase efficiency, the sophistication and structure of risk - management models vary widely, belying the notion that their use would create herdlike behavior. this point applies with full force to value - at - risk models in use at u. s. commercial banks, a topic about which the federal reserve has gained considerable knowledge through supervisory oversight. our examiners have observed how banks implement a common objective - measuring the value at risk of the bank ’ s trading account - in diverse ways. other sources of diversity among financial firms include differences in customer bases and product lines. these additional sources of variation create considerable heterogeneity in financial firms ’ trading strategies, in their risk - taking, and in their responses to market shocks. nonetheless firms should be aware of the models that their competitors are using and alert to the possibility that a single model could carry undue weight in the assessment of risk in a particular market. still, neither the models nor the actual risk positions are now, or are likely to be, as similar as assumed by observers concerned about the negative implications of model - based risk management. in addition, it would be a mistake to think that decisionmaking at financial firms has become, or is likely to become, so rigidly bound by models that the models would dominate the process in any meaningful sense. judgment, experience, exposure limits, and procedures for exceptions are also significant and, at times, critical, and it is important that

responsibilities at the fed, which is bank regulation and supervision. i am sure that we will have the opportunity to discuss many issues of interest to you during our discussion, but i ’ d like to mention a pending rulemaking that would update the community reinvestment act. i understand that the draft rule was intended to provide greater clarity to banks regarding community development activities and their consideration for cra. while i am a strong supporter of the fundamentals behind cra, and i support community development activities, i am concerned that the proposal does not adequately account for the costs and benefits of certain provisions, and that no attempt has even been made to either ensure that or to analyze whether the benefits exceed the costs, which is a fundamental element of effective regulation. the comment period for the proposal ended on august 5, and i will repeat what i have said in the past : if this proposal affects you or your business, i - 7hope that you made your voice heard by submitting a comment to the more than 600page proposal within the short 90 - day comment period. public comments really do matter when considering the content of proposed rulemakings. of course, my comments about the benefits of public participation in rulemaking apply beyond the cra proposal, and there are other regulatory topics on the horizon that would benefit from robust engagement. one that comes to mind is the regulatory framework for analyzing bank mergers. earlier this year, the justice department requested comment on whether to revise their 1995 bank merger competitive review guidelines, seeking input on a wide range of issues. the fdic also issued a request for information on the bank merger act framework. i expect this review will be a focus across the banking agencies, and i will be very interested to see how the framework for small and regional banks is affected by any proposed change. i would be concerned about any changes that would result in making mergers among these institutions more difficult or would not address some of the longstanding issues with the existing framework. among those are that the framework doesn ’ t account for new technologies or overwhelming competition posed by credit unions, internet based financial services, and non - bank financial companies. another concern is that overly strict criteria for mergers could have the unintended consequence of depriving consumers in some areas of access to any banking services. “ banking deserts ” in rural and underserved areas are a real problem and regulators should guard against this outcome when proposing or evaluating rules. i should also briefly mention three other regulatory topics of interest to all