ii. we have reviewed comments on the anpr and are working on a notice of proposed rulemaking. we are mindful that amendments to the basel i rules should not be too complex or too burdensome for the large number of small - and midsized institutions to which the revised rules might apply. indeed, a number of those commenting on the anpr advocated leaving existing rules unchanged. with regard to both the basel ii proposals and the proposed basel i amendments, we understand the need for full transparency. for that reason, we expect to have overlapping comment periods for the see basel committee on banking supervision, “ results of the fifth quantitative impact study ( qis5 ), ” table 3, the bank for international settlements. basel ii npr and the npr for the proposed basel i amendments. in fact, we want all interested parties to compare, contrast, and comment on the two proposals in overlapping timeframes. accordingly, either of our proposals could change as a result of comments received or new information gathered. conclusion from the federal reserve ’ s perspective, the publication of interagency proposals relating to basel ii is a very positive development and demonstrates the ability of the agencies to work cooperatively to modernize our regulatory capital framework. the federal reserve ’ s commitment to the basel ii process remains as strong as ever, even as we recognize that the proposals remain subject to further comment and that there is likely much more work to be done. we encourage comments from all interested parties and will give them careful consideration. i would like to emphasize that the federal reserve desires to ensure that the final rule for basel ii is a substantial enhancement over existing basel i rules, appropriately capturing the risks of our largest, most complex banks, and encouraging continual improvement in risk - measurement and - management systems. we look forward to working with the other agencies as we enter into the final rule phase of the basel ii process. we recognize that many institutions have been diligently preparing for basel ii implementation and we understand our obligation, as supervisors, to support institutions wanting to adopt basel ii at the first available date. we suggest that those institutions continue to move forward with implementation planning, including identification of gaps in their own preparation. finally, i would like to assure the committee members that we at the federal reserve are pursuing basel ii because we believe it will help to preserve the safety and soundness of our nation ’ s banking system. in our dual role as the central bank and supervisor of banks, bank holding companies, and financial holding companies

not require banks to increase capital as their potential for losses rises. basel ii addresses this by including in pillar 2 the requirement that the bank have a plan in place to ensure that sufficient capital will be available in the downturn of the economic cycle. thus, for the largest organizations, we need to move beyond basel i to a more risk - sensitive and more comprehensive framework for assessing capital adequacy. basel ii represents the concerted efforts of the international and u. s. supervisory community, in consultation with banks and other stakeholders, to develop such a framework, drawing upon wellknown economic capital concepts that the largest banks already employ as part of their risk management efforts. in addition to its supervisory authority, the federal reserve, as the nation ’ s central bank, has responsibility for maintaining stable financial markets and ensuring a strong financial system. that responsibility mandates that we require banking organizations to operate in a safe and sound manner with adequate capital that appropriately supports the risks they take. this is especially critical in today ’ s environment where we have a growing number of banking institutions with more than $ 1 trillion in assets, complex balance sheets, opaque off - balance sheet transactions, and far - reaching operations that pose significant risk - management challenges that are fundamentally different from those faced by smaller institutions. naturally, we must also ensure that our regulations and supervisory oversight are in tune with bank practice, are able to identify the risks being taken by banks today, and have enough flexibility that they will continue to be prudent and relevant in an everchanging risk environment. as chairman bernanke has noted, a regulatory and supervisory system that is not in tune with the financial marketplace may increase the costs of regulation, stifle efficiency and innovation, and ultimately be less effective in mitigating the moral hazard problems associated with the federal safety net. the advanced approaches of basel ii are much more risk sensitive, cover more areas of potential risk facing banking organizations, and provide better incentives for institutions to improve risk measurement and management. in addition, basel ii provides supervisors with a more conceptually consistent and more transparent framework for evaluating systemic risk in the banking system, particularly through credit cycles. in sum, basel ii will establish a more coherent relationship between regulatory measures of capital adequacy and day - to - day supervision of banks, enabling examiners to better evaluate whether banks are holding prudent levels of capital given their risk profiles. continuing the implementation process the agencies ’ proposed rulemakings, representing our view about