their home or in third countries. for their part, the u. s. authorities have clearly stated that they will be flexible during a transition period so that the relevant foreign banks can more easily meet the required standards, but national treatment policies will apply. discussions within the aig on this issue - as well as bilateral discussions with affected banks and their supervisors - have been productive, and i think the associated problems will be addressed. however, one issue appears to be particularly difficult in more than one jurisdiction : the allocation of capital for operational risk among the legal entities within and across jurisdictions. problems do not come more practical than this. operational risk is generally measured on a consolidated basis, often by business line. that diversification benefits exist on a consolidated basis suggests that operational risk estimated from the bottom up - by, say, legal entity - would not only be more difficult but might well add up to more than the total from the top down. the problem is only made more complicated by the understandable focus of supervisors in each jurisdiction on ensuring that the entities under their supervision are sufficiently capitalized to absorb risk. we have come a long way in global banking, with deference to home consolidated supervisors, but the legal entity supervisor still needs the assurance that capital is protecting risk in the individual unit. basel ii is not going to succeed or fail on this practical problem or on similar problems - and this will certainly not be the last. through the aig a compromise will be developed on the issue of operational risk capital to ensure that capital is sufficient and is allocated in a reasonable way. other issues, including home - host tensions, will be resolved in similar ways as the member countries hear comments, conduct analysis, and then seek out a viable compromise solution. the process the practical give and take of discussions is exactly how the first and now the second capital accord have been and will be developed. we are at a critical stage of that process with changes in significant provisions being studied and modified. examples are the shift in standard to unexpected loss only and the review of securitization, credit card, and credit risk mitigation, all of which are now being actively studied. it may seem strange that this far into the process - approaching year six - that such changes are being made. these changes, however, show how seriously the basel committee and its participating national authorities regard the public comment process and benefit from the analysis of bankers and other interested parties. when analysis and evidence were put forward, the committee responded. the

janet l yellen : welcoming remarks speech by ms janet l yellen, chair of the board of governors of the federal reserve system, at the community banking in the 21st century, the third annual community banking research and policy conference, cosponsored by the federal reserve system and conference of state bank supervisors, federal reserve bank of st. louis, st. louis, missouri, 30 september 2015. * * * thank you. it is truly a pleasure for me to join president bullard and chairman cotney in welcoming you to the community banking research and policy conference, which i am proud to say has been cosponsored since its inception by the federal reserve system and the conference of state bank supervisors ( csbs ). this is the third year for this conference, which i consider a milestone. the first time you organize a conference like this, all you can be sure about is that there was indeed enough research and interest for such a conference. the second time it is held, you proved that you could do it again. but the third year, this year, is when we can start to feel we have established a tradition. if this year ’ s conference comes even close to being as successful as the first two were, and i expect it will be, i hope that we have established an ongoing role for this gathering, which provides such a great opportunity for bankers, regulators, and academic researchers to come together to share ideas and insights about the issues that matter most in community banking. based on the agenda and conference materials i have seen, i expect participants over the next two days will tackle some of the most important issues facing community banks, provoke discussion and debate about opportunities and challenges, and generate some promising ideas about how community banks can continue to play the indispensable role they have played in so many communities. the lineup of speakers, which includes my federal reserve board colleague, governor brainard, is impressive. she and others will delve deeply into the important research questions and other issues facing community banking. my role today is to welcome you on behalf of the federal reserve board. in the interest of getting to the important work of this conference, i will be brief, but if i accomplish anything by speaking to you today, i hope it is to convey the board ’ s understanding of the unique and important role of community banks in our financial system as well as the board ’ s commitment, at the highest level, to consider how our supervisory and regulatory decisions affect those institutions. my