agencies asked for public comment on possible alternative standards for noncomplex banks, simpler than anything in the basel proposal. i will be discussing the various " simpler " options - - both from our advance proposal last fall and from the new basel framework proposed in january. one outcome after considering these options may be to retain the current system, or tweak it only modestly, for most noncomplex, non - internationally active banks. innovations in the new proposal the basel proposal represents a watershed in supervisory policy, redefining the regulatory approach to bank supervision for some banks and providing others with new incentives to improve their riskmeasurement procedures. let me call your attention to some of the most important innovations in the new proposal and, at the same time, explore whether these innovations would be appropriate for community banks. three pillars. the basel committee's approach rests on three so - called pillars : ( 1 ) the new capital standard itself ; ( 2 ) increased supervisory review of banks'internal assessments of their own capital adequacy ; and ( 3 ) additional public disclosure of bank risk profiles. in contrast, the original basel accord rested on a single pillar, a regulatory minimum for capital. pillars 1 and 2 in effect distinguish two concepts of capital adequacy : regulatory minimum capital set by pillar 1 and the supervisor's evaluation of banks'internal calculations of their economic capital under pillar 2. by " economic " capital i mean the amount of capital that management has determined is required to reflect the risks, strategy, and objectives of its individual bank, regardless of the regulatory structure. the regulatory minimum, in effect, provides a threshold for early intervention by supervisors. the procedures and assumptions embedded in the internal measure of economic capital drive business decisions of the bank by permitting management to gauge the capital costs of, and better establish the price for, credits of varying degrees of risk. using pillar 2, supervisors would plan to evaluate the internal capital - allocation process for integrity and economic sense, and to ensure that the underlying processes and assumptions used to measure economic capital are reasonable and consistent with the principles in pillar 1. finally, pillar 3 looks to market discipline to supplement and reinforce the effectiveness of pillars 1 and 2 in disciplining the risk - taking of banking organizations. in principle, the three - pillar approach applies to community banks as well as to lcbos. in practice, however, the relative importance and detailed application of the three pillars would clearly be quite different at lcbos and at community

managers'tolerance for risk and market expectations for banks'capital as from the influence of bank supervisors. bank management, the market, and the supervisors all understand that the current capital standard sets minimum capital requirements, not the economic levels that are required for prudent operations. for all these reasons, community banks have consistently maintained higher capital ratios than larger banks since long before a regulatory capital standard was implemented. at the end of 2000, for example, banks with total assets of less than $ 1 billion had an average tier 1 leverage ratio of almost 10 percent and an average total risk - based capital ratio of almost 15 percent - - both about double the minimum standard. in contrast, banks with assets greater than $ 10 billion had average ratios of about 7 and 11. 5 percent, respectively. these and often larger differences extend back as far as data are available. despite having capital ratios typically well above any minimum that regulators would require, community banks appear to have little interest in the advance proposal for noncomplex banks. in the small number of comment letters we have received, community banks did not express a clear preference for gaining a simpler regulatory capital measure in exchange for potentially higher minimum capital requirements - - requirements still well below their economic or maintained capital. the gains in simplicity were apparently not viewed as offsetting the costs of changing from the current set of rules to a purportedly simpler system. the intent of the proposal, by the way, was to reduce regulatory burden on smaller banks while ensuring that their capital remains at prudent levels. key questions i hope my comments have clarified that the new basel and interagency proposals raise some important questions about the appropriate capital standard for u. s. community banks. if community banks want to shape the outcome, they must convey their views on several key questions. who is under what standard? a crucial question that we should consider is which banks or types of banks will pursue which alternative capital standards. clearly, all or almost all of the truly global institutions, worldwide, would be expected to use an irb approach, with most of them moving to the advanced approach, if they are not there at the outset. most other large banking organizations, such as the large u. s. regional banks, are also likely to pursue that approach, at least eventually. supervisory and market pressures, alone, would presumably force the global and large regional banks in that direction. given the systemic risk posed by implications and sheer complexity of many of our largest institutions, supervisors worldwide should at least