agencies understand that outside parties will likely want to see the notice of proposed rulemaking for basel ii and the relevant proposals for amending current rules alongside one another for comparison's sake. conclusion broadly speaking, in developing basel ii we are striving to establish higher standards for internal risk management at banking organizations, including capital adequacy, and to improve both the supervisors'and the public's understanding of banks'risk taking and risk management. over the past two decades, major banking organizations have become ever larger and more complex, while some national financial systems have become more concentrated. against this backdrop, assessing the overall risk and capital adequacy of the largest banks has become not only increasingly difficult for supervisors, the public, and bank management, but also critical for national authorities. if you believe, as i do, that basel i was one of the most important advances in international bank supervision, then i hope you also accept that market changes and increased sophistication in risk - management techniques require that we now update that initial framework. a fundamental premise of basel ii is that, for these major banks, neither supervisory nor market discipline can be effective unless banks'own systems can be depended on to measure and manage risk taking and capital adequacy. basel ii is intended to provide both a framework and incentives for achieving these ends. it is useful to keep in mind that as supervisors we are seeking to apply a new set of rules to private, profit - seeking businesses and are trying to achieve the goals of basel ii in a manner consistent with achieving safety and soundness in a market economy. for example, we want to be relatively certain that the required capital levels for business lines ( and, of course, for the bank as a whole ) are in line with the underlying risks, and we need to have a certain degree of confidence in the capital numbers for each bank. we also want banks to target their investments where they can have the greatest positive impact on risk measurement and management. in other words, we are not looking for large expenditures in areas for which the benefits will not be material. finally, we would like to see some comparability across banks, at least in their estimation of the inputs for basel ii, but at the same time offer a certain degree of flexibility to reduce burden on the banks and allow them to retain their own styles of risk management. admittedly, navigating between consistency and flexibility is an art, but our experience tells us that it is

. supervisors and the industry need to maintain an ongoing dialogue about basel ii, since it is such a complex and multifaceted project. issues range from very technical questions about parameter values to broad concerns about how the framework will be implemented across countries. we hope it is clear that we are being attentive to the full range of these concerns and will continue to be as the industry raises additional concerns along the way. the continued emphasis on dialogue is even more important because a few important elements of the framework are still considered works in process. for example, the basel framework issued last june did not define the exact manner in which institutions should calculate their estimates of loss given default ( lgd ) based on periods of economic downturn. the basel member countries have commissioned a subgroup to study this issue, recommend a way to add clarity to the concept of downturn or " stress " lgds, and provide guidance to the industry. the basel committee has also recently issued a consultative paper on certain trading - related exposures and double - default effects, stemming from the work of a joint group formed by the basel committee on banking supervision and the international organization of securities commissions. we are acutely aware that our continuing work on these issues is complicating banks'preparations somewhat. but since these issues are so critical, we have to take the extra time to find the right solutions. and we need the help of the industry to do so. competitive effects of basel ii before i close, i would like to say a few words about the potential competitive effects of basel ii. at the federal reserve, we are particularly interested in effects that basel ii could have on banking markets, particularly ones that could distort existing markets that work well. in that vein, we have published several white papers analyzing the potential impact on specific aspects of banking, such as small - business lending, mortgage lending, and mergers and acquisitions. a paper on credit cards is forthcoming. while the conclusions of the papers published so far do not point to broad disruptions in existing banking markets as a result of basel ii, we do acknowledge that certain participants could be affected, especially in the small - business and residential - mortgage credit markets. in part to address these concerns, but also to conduct overdue routine updates to existing regulatory capital rules, the agencies also plan to propose several modifications to the current rules that most banks in the united states will continue to follow, since basel ii is expected to apply to only a handful of institutions. the