special bank inspection in 2002 and 2003, when japanese banks were still recovering from a crisis. the fsa publicly released aggregate results showing the differences between the banks ’ and the fsa ’ s assessments of loan quality, which showed that the fsa ’ s assessments were more stringent than the banks ’. many of the major banks subsequently increased their loan loss reserves, and the in addition, it would be important to assure that the routine release of selected supervisory information did not undermine our ability to maintain the confidentiality of other supervisory information. inspections appeared to increase confidence in the banking system. of course, the informational benefit to market participants could be substantially diluted if they are unable to distinguish the conditions of individual firms as reflected in the aggregate numbers. conclusion to conclude, you should now have a sense of the degree to which our experience with scap experience has informed changes in our supervision of large institutions as part of the broader enterprise of regulatory reform. as to the issue of stress test transparency, i look forward to hearing how others assess the merits of the alternative approaches i have described and, of course, any new ideas.

the bank has a strong incentive to restructure the positions to allow them to be reclassified into a lower regulatory risk category, by using securitization or other devices. if the bank doesn ’ t do this, it cannot make a market rate of return on the regulatory capital of 8 percent on the loans. regulatory arbitrage, from the perspective of proper resource allocation, can be a good thing. if there were no way for the bank to avoid the uneconomically high regulatory requirement, it would need eventually to exit its low risk businesses because of insufficient returns to equity. in the long run, this would serve no purpose other than causing the regulated entity to shrink in size relative to its unregulated competitor. at the extreme, the one - size - fits - all capital standard, if there were no arbitrage safety valve, would cause the bank to engage in only those activities for which the economic capital requirement is greater than the 8 percent regulatory standard. that is, the regulatory standard would induce risk - taking - - perhaps excessive risk - taking. while regulatory arbitrage can be useful in negating improperly high regulatory capital requirements, it can also be used to mask the true riskiness of the bank. in the united states, for example, the top 50 bank holding companies have a mean total risk - based capital ratio of 12. 1 percent. the standard deviation of this ratio across the 50 institutions is only 0. 8 percent. in other words, everyone seems to be holding about the same amount of capital. indeed, since a bank is declared to be “ well - capitalized ” when its total risk - based capital ratio is over 10 percent, it is not surprising that we see no top - 50 banking company with its ratio less than 10 percent. but do all these banks have equally low insolvency probabilities? one simply can not tell much of anything by looking at capital ratios. it is perfectly possible that a bank may hold 12 percent capital when a more carefully constructed internal risk model would call for holding 15 percent, or even 18 percent, capital to meet the bank ’ s internal insolvency standard. or, the bank could have a great model, but simply have a preference for risk that is unacceptable to regulators. such a bank may be holding risky positions for which even its own model would call for more capital, if the bank were to adhere to a lower insolvency probability standard. for such a bank