susan schmidt bies : the basel ii accord and house resolution 1226 testimony of ms susan schmidt bies, member of the board of governors of the us federal reserve system, before the subcommittee on domestic and international monetary policy, trade, and technology and the subcommittee on financial institutions and consumer credit, committee on financial services, us house of representatives, washington, 11 may 2005. * * * chairman bachus, chairman pryce, and members of the subcommittee on financial institutions and consumer credit and the subcommittee on domestic and international monetary policy, trade, and technology : it is a pleasure to join my colleagues from the other banking agencies to discuss the current status of basel ii in this country, as well as the federal reserve's views on h. r. 1226. the continued discussion among the congress and the regulators - and, of course, the banking industry and other members of the public - is critical to the final implementation of the new capital accord. the focus of recent attention has been the agencies'announcement that they will delay the notice of proposed rulemaking ( npr ) for basel ii, originally scheduled for midyear 2005. in my remarks today, i will discuss the reasons for the delay and the board's views regarding the timetable for implementation of basel ii in this country. but, first, i believe it may be useful to remind the members of the subcommittees why the agencies thought it wise to explore and then develop a modernization of the current capital accord ; those factors have become, if anything, more important than they were when we began the process. our banking system is becoming more concentrated, with a number of very large entities operating across multiple business lines and national boundaries, each entity with positions and exposures that are both complicated and difficult for third parties to understand. these entities have outgrown the current regulatory capital regime, which is still adequate for most banks. but the current rules simply cannot keep up with the complex business of the global banking organizations toward which basel ii and its infrastructure prerequisites are directed. these organizations represent significant risks to the financial system should they develop substantial problems in a period of stress. basel ii offers the opportunity to work with these large entities to develop quantitative risk - measurement and risk - management systems that can both measure their risk more accurately and become the basis for more risk - focused capital requirements and prudential supervision. we would also require, as part of the basel ii approach, more public disclosures to improve market discipline and supplement supervisory efforts.

developing easily understood disclosures as they introduce more innovative and complex products that can be confusing to consumers. as you may know, the u. s. banking agencies recently issued proposed guidance on nontraditional mortgages. the comment period for this interagency proposal closed on march 29, so we are now in the process of reviewing comments and determining how to proceed. nontraditional mortgages allow borrowers to defer payment of principal and, sometimes, interest. while the proposed guidance focuses on banks'ability to adequately identify, measure, monitor, and u. s. money laundering threat assessment released control the risk associated with these products, it also addresses consumer protection. nontraditional mortgages, including " interest - only " mortgages and " payment - option " adjustable - rate mortgages, have been available for many years, and are beneficial for some borrowers because of the payment flexibility they offer. although these products were initially designed for higher - income borrowers, today these products are being offered to a wider spectrum of consumers, including borrowers for whom these types of mortgages may be ill - suited. moreover, institutions are combining these nontraditional loans with other practices, such as reduced documentation of income and assets in evaluating applicants'creditworthiness. many borrowers may not fully recognize the risks of nontraditional mortgages, particularly " payment shock " when the loan's interest rate increases, or when the consumer is required to make fully amortizing payments. negative amortization coupled with flattening, or even lower, housing prices could make it difficult for some borrowers to refinance or sell the property to avoid payment shock. in addition to ensuring that institutions comply with the truth in lending act and other applicable laws, the draft guidance urges institutions to ensure that their advertisements, promotional materials, and oral communications are consistent with the product terms and that these communications provide clear, balanced, and timely information about the risks. this is important so that consumers have the information they need at critical decision times, such as when selecting a loan product or choosing a specific payment option each month. the board's truth in lending regulations require creditors to provide consumers with disclosures about the loan terms, including a schedule of payments. for interest - only and payment option arms, the payment schedule shows consumers how their payments will increase to include amortization of the principal. the proposed interagency guidance describes how institutions can use their promotional materials to provide better information about the features