outline suggested changes to basel i. in part, these proposed changes are meant to address concerns about the potential adverse competitive effects of basel ii. the federal reserve takes concerns about competitive effects seriously and has conducted substantial research on the topic. during the process to amend basel i, we sought input from the industry and other interested parties. in view of those concerns, regulators have proposed changes to enhance the risk sensitivity of u. s. basel i rules ; we also remain vigilant about identifying potential competitive distortions that might be created with the introduction of basel ii. we are also mindful that amendments to basel i should not be too complex or too burdensome for the multitude of smaller banks to which the revised rules would apply. that is, in amending basel i for these institutions, we are trying to find the right balance between added risk sensitivity and regulatory burden. that balance is not necessarily easy to find. for example, one way to tie regulatory capital more closely to risk under basel i would be to expand the number of factors used to determine risk weights - for example, to include credit scores or external credit ratings. the tradeoff is that incorporating additional risk measures is likely to increase the burden of calculating regulatory capital. the comments received suggest that institutions differ on how best to make this tradeoff. we will continue to evaluate this tradeoff and solicit further comments on how to proceed. conclusion we expect that risk management and banking supervision will continue to develop along parallel tracks. the basel ii framework represents an important effort by supervisors to integrate leading - edge risk management practices with the calculation of regulatory capital requirements. the ongoing work on this framework has already led large, complex banking organizations to improve their systems for identifying, measuring, and managing their risks. indeed, banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. the banking agencies will continue to promote supervisory approaches that complement and support banks'own efforts to enhance their risk - management capabilities.

can rise and that negative amortization can increase the amount owed on the property above what was originally borrowed. these products warrant strong risk - management standards as well as appropriate capital and loan - loss reserves. compliance - risk management another area the financial sector and the regulatory community are focused on today is compliancerisk management. “ compliance risk ” can be defined as the risk of legal or regulatory sanctions, financial loss, or damage to an organization ’ s reputation and franchise value ; this type of risk may result when an organization fails to comply with the laws, regulations, or standards or codes of conduct that are applicable to its business activities and functions. the federal reserve expects banking organizations to have in place an infrastructure that is able to identify and control the compliance risks facing their organization. fortunately, many banking organizations in the united states substantially affected by these risks are ahead of the curve and have invested in enterprisewide corporate compliance. to create appropriate compliance - risk controls, organizations must first understand risks across the entire entity. managers should be expected to evaluate the risks and controls within their scope of authority at least annually. i also emphasize the need for the board of directors and senior management to ensure that staff members throughout an organization understand the compliance objectives and the role they have in implementing the compliance program. clear lines of communication and authority help to avoid conflicts of interest. an enterprise - wide compliance - risk management program should be dynamic and proactive, meaning it constantly assesses evolving risks when new business lines or activities are added or when existing activities are altered. to avoid having a program that operates on “ autopilot, ” an organization must continuously reassess its risks and controls and communicate with its business lines. an integrated approach to compliance - risk management can be particularly effective for bank secrecy act and anti - money - laundering ( bsa / aml ) compliance. often, the identification of a bsa / aml risk or deficiency in one area of business can indicate potential problems or concerns in other activities across the organization. controlling bsa / aml risk continues to be a primary concern for banking organizations. we recognize the investment and commitment that organizations have made toward compliance with bsa / aml requirements, and, in return, we continue to work to ensure that obligations in this area are clearly understood and communicated to banking organizations and examiners alike. the federal financial institutions examination council ( ffiec ) bsa / aml examination manual issued last year is one example of our interagency efforts. we also