based on the new knowledge gained from this additional analysis, the u. s. agencies collectively decided to move ahead with our next proposal but adjust the plan for u. s. implementation of basel ii - - as announced in our joint news release on september 30. among a number of adjustments, we indicated our intention to extend the timeline for implementation and augment the transitional floors, which should provide bankers and regulators with more experience with basel ii before it is fully implemented in the united states. in terms of the specifics of the qis4 analysis, we learned that the drop in qis4 capital was largely due to the favorable point in the business cycle when the data were collected. while the previous qis3 exercise was conducted with data from 2002, a higher credit loss year, qis4 reflected the more benign credit conditions present in 2004. we learned that the dispersion among institutions was largely due to the varying risk parameters they used, permissible in the qis4 exercise, and also due to portfolio differences. that is, banks have different approaches to risk - management processes, and their models and databases reflect those differences. importantly, we also learned that some of the data submitted by individual institutions was not complete ; in some cases banks did not have estimates of loss in stress periods or used ad hoc estimates, which might have caused minimum regulatory capital to be underestimated. based on the results of qis4, the federal reserve recognizes that all institutions have additional work to do. in our view, the findings did not point to insurmountable problems, but instead identified areas for future supervisory focus. in that way, the qis4 analysis was critical in enabling us to move forward. we were also pleased to see that general progress is being made toward developing more risk - sensitive capital measures. as most of you know, the plans for u. s. implementation include a year of parallel run - - a period in which minimum regulatory capital measures for basel ii will be calculated parallel to the existing basel i measures - - as well as three years of transitional floors. the agencies expect to perform additional indepth analyses of the basel ii minimum capital calculations produced by institutions during the parallel - run and transitional - floor periods before we move to full implementation without floors. we want to ensure that the minimum regulatory capital levels for each institution and in the aggregate for the group of basel ii banks provide an adequate capital cushion consistent with safety and soundness. it is also helpful to remember that

mas ’ conduct of monetary policy. they are factored in the construction of the mas portfolio and closely monitored on an ongoing basis. mas employs a comprehensive range of stress tests to assess the risks to the portfolio on an ongoing basis and establish whether the portfolio remains resilient to potential tail risk events over the medium term. three types of stress tests are conducted : historical : shocks are applied to the portfolio using asset price movements seen in historical stressed episodes, such as the global financial crisis, 2000 dot - com bust, 1994 bond market selloff, etc. vulnerability - based : the portfolio is subject to hypothetical scenarios which stress in turn each of the portfolio ’ s risk factors such as equity, interest rate, credit, inflation, and foreign exchange. thematic : these are forward - looking stress tests and are designed by taking into account prevailing market conditions and potential risk events on the horizon. 4 / 7 bis central bankers'speeches depending on the stress test results, mas will consider appropriate responses and portfolio adjustments when needed. the risk management framework is reviewed on a regular basis to ensure it remains fit - forpurpose. balanced asset allocation subject to the liquidity and risk tolerance thresholds, mas seeks to achieve good long - term returns on the ofr through a balanced asset allocation. mas invests the ofr in a well - diversified portfolio, probably more diversified than is the case for most central banks. the portfolio is geographically diversified across advanced and emerging market economies, with investment - grade bonds in advanced economies making up the largest share. the portfolio is diversified across asset classes – in cash, bonds and equities. the portfolio has a diversified currency mix, with about three - quarters of the ofr denominated in us dollars, euros, japanese yen and pound sterling, with the us dollar forming the bulk. each asset class in the portfolio serves a function. cash and nominal government bonds facilitate regular operational needs and can be quickly deployed to fulfil urgent liquidity needs under stressed conditions. advanced economy inflation - linked bonds are less liquid than nominal bonds but provide inflation protection. equities provide exposure to long - term growth assets with higher return potential but also with higher risk. mas ’ investment horizon is longer than that of many central banks. this has given mas the flexibility to invest in more volatile ( and longer ‘ duration ’ ) asset classes beyond fixed income, including equities. both the risk management framework and strategic asset allocation are approved by the mas board of directors and reviewed regularly.