. regime, based on basel i. the global banks ’ concerns about the bifurcated u. s. application depend in part on whether they are based here or abroad. for foreign banks the issue is the additional complexity and perceived inequity they will face if they have chosen to operate in the rest of the world under the foundation approach for credit risk, an approach which will not be permissible in the united states. ( i am making the reasonable assumption that the foreign banks whose u. s. subsidiaries would be required to use the advanced approach, or who, for competitive or other reasons, choose the advanced approach in the united states, will be operating in their home country under the foundation approach at least. ) for u. s. - based banks the fear is that foreign rivals may get a competitive edge for one year through lower regulatory capital requirements in some markets ; the potential head start for foreign banks arises because the permissible start date for the foundation and standardized versions is the beginning of 2007, while the advanced approach, with its greater complexity for banks and supervisors, starts in all markets at the beginning of 2008. a foreign bank under the foundation approach at home but under the advanced approach in the united states would have to determine two variables in the united states for its corporate exposures that would not be required of its consolidated entity : loss given default ( lgd ) and exposure at default ( ead ). for its consolidated entity at home it would need to calculate only the probability of default. the u. s. subsidiary might well find it a real challenge to gather the needed data and generate the lgd and ead parameters required in the united states ; doing so would certainly add cost, even for an entity using the full foundation approach at home. the u. s. authorities did not make their decision to require the advanced approach lightly. given the structure and size of our markets, we believe it necessary that large entities operating here use sophisticated techniques for risk measurement and management that rely on bank estimates of all the risk variables required by the advanced approach. nonetheless, we understand our global responsibilities for cooperation. both bilaterally and through the aig, we will continue to work with u. s. subsidiaries of foreign banks and their home supervisors on transition steps, where necessary, although we expect to continue to require full implementation within a reasonable period of time. these transition steps could involve, for example, relying on conservative estimates of the lgd and ead parameters when the

bank in question is not yet prepared to provide estimates derived from its own experience. for a limited period, we also may be willing to consider conservative methodologies for allocating consolidated operational risk capital charges to the u. s. subsidiary. although we will do what we can to facilitate transition, let me be clear that, for both domestic and foreign banks, we expect that plans for full adoption will be complete within a relatively short period. moreover, any shortfalls in systems will have to be disclosed under pillar 3 ; and we reserve the right, under pillar 2, to require additional capital during the transition to full implementation. it was a difficult decision for the basel supervisors ’ committee to delay by one year, to 2008, the start date for implementation of the advanced approach while retaining the 2007 target for the other approaches. the delay reflected the realities that many banks that will be applying the advanced approach needed more time and that the requirements in the united states for public comment and review made it impossible for final u. s. rules to be promulgated before 2006. thus, the earlier start for the other approaches, along with the imposition of the 95 percent of basel i capital floor for that first year, 2007, seemed to all concerned to be a reasonable compromise, more practical than trying to hold to the original schedule for all banks or delaying the start date for approaches not permitted in the united states. under the circumstances, consistent with our agreement to have a single, worldwide start date for the advanced approach, the u. s. authorities do not see any opportunity for implementation of the advanced approach in the united states before 2008, regardless of any individual bank ’ s ability and readiness to do so.