any lcbo adopts the advanced approach – and i believe some intend to – it seems likely the market will pressure all the large banks to adopt it or be judged as having something to hide or having standards not quite up to snuff. there will also be direct economic incentives to adopt irb approaches. the effective average risk weight for a bank as a whole should decline with the more sophisticated approaches depending on the extent of capital arbitrage already accomplished. if true, such banks would achieve lower total regulatory capital charges and, consequently, a higher reported risk - weighted capital ratio. at the same time, given the different risk profiles at individual banks, capital requirements almost certainly would vary more widely under the new risk - based capital ratios than under today's measure. however, banks would then presumably respond to changes in their risk - based capital ratios. for example, a bank with a relatively low risk portfolio would find that its risk - weighted capital ratio increased because its risk - weighted exposures had declined. it would, as a result, presumably reduce its capital, or increase its leverage, or even increase its risk exposure. a bank with a higher level of risk - weighted exposures resulting in diminished risk - based capital ratios would presumably do the opposite : raise more capital, or reduce its leverage, or reduce its risk exposures. at the end of this adjustment process, we might again – for either competitive reasons or because of the incentives from the prompt - corrective - action structure – have a relatively tight configuration of risk - weighted capital ratios, especially at lcbos, but riskier banks would be holding more absolute capital to support their risks. indeed, that is the whole purpose of the exercise. in contemplating your own bank ’ s effort to prepare for adoption of the irb approach, i would suggest that a pivotal step is warehousing your own institution ’ s credit - loss experience. to be candid, the scarcity of data on losses has been a major stumbling block in the development of the irb approach. let me urge all of you to follow the example of some of you and move quickly in this direction. data storage is extraordinarily cheap these days, but we all know that extracting and organizing the right data from existing systems is very expensive and often painful. nonetheless, the contribution of better data to sound risk management will undoubtedly prove to be extremely valuable. as you develop your own plans, let me emphasize that supervisors will be looking for a committed and

primarily focus on vulnerabilities and the buildup of risks that can accrue over time potentially affecting the resiliency of the financial system. the financial stability report is worth a read. and while i will not recite the many findings of that report today, i will highlight a few of the risks discussed in the report. it is important to keep in mind that the report provides only a snapshot of the current financial stability vulnerabilities and risks. because the report treats cyberattacks and geopolitical events as shocks, it touches on them only in a cursory way, even though these are important financial stability risks. instead, the report focuses on key vulnerabilities that are more easily monitored and provides insights into the financial stability outlook as it relates to these factors. while the framing of the financial stability report — in terms of shocks and vulnerabilities — can be a useful, structured approach to consider this topic, there are many ways to think about financial stability. often the boundary between shocks and vulnerabilities is a permeable one, and the buildup of risk can become so severe that it becomes a shock. the federal reserve plays an important — but limited and non - exclusive — role in proactively addressing financial stability risks and responding to them once they manifest as stress across the system. as i think about the tools we use to address financial stability concerns — and the tradeoffs we are often forced to make when exercising these powers — it is helpful to consider the lessons regulators have learned over time. while the end goal is the same — ensuring resiliency see board of governors of the federal reserve system, financial stability report ( washington : board of governors, april, 2024 ), https : / / www. federalreserve. gov / publications / files / financial - stability - report - 20240419. pdf. - 3in the financial system to promote financial stability — there are a number of tools that can be used to address the unique characteristics of vulnerabilities and shocks. the federal reserve ’ s financial stability monitoring does not operate in a vacuum. to the contrary, our other statutory authorities — including monetary policy or promoting safety and soundness in the banking system — can complement or conflict with the goal of promoting financial stability. many of these authorities interact with banking activities and institutions that are subject to our supervisory or regulatory authority. in light of this, i will begin by discussing how the use