agencies propose that only the most advanced approaches under basel ii be offered for banking organizations in the united states : the advanced internal ratings - based approach for credit risk, known as a - irb, and the advanced measurement approach for operational risk, known as ama. as indicated in the anpr, the standardized approach and the foundation irb approach to basel ii would not be permitted for credit risk. nor would the basic indicator approach or standardized approach be available for operational risk. the banking agencies took considerable time to develop the advanced proposals, which we believed would clearly be the best option for the u. s. banking system. the complex operations of the largest banks have outgrown the existing capital regime, and for them basel i has become less and less effective. indeed, in the view of u. s. supervisors, an overhaul of the regulatory capital system for our largest banks would be worthwhile only if the most advanced approaches were used. because of the heterogeneous nature of the u. s. banking system, some balance in the application of basel ii would be necessary. on the one hand, the size, scale and complexity of the internationally active u. s. banks requires, in the opinion of the u. s. supervisors, that these entities operate with the best feasible risk measurement and management procedures, and these procedures are most consistent with the advanced versions of basel ii. on the other hand, the u. s. agencies do not want to impose the higher costs of the advanced version of basel ii on institutions for which it is clearly not suited. in the end, the u. s. banking agencies tried to allow as much choice as possible, while ensuring that banks are still meeting domestic regulatory obligations, avoiding private - sector costs that do not produce some clear and convincing level of benefits, abiding by the evolving basel ii agreement, and, most important, maintaining a safe and sound u. s. banking system. the u. s. banks that would be required to adopt basel ii, as well as those that we expect to choose or opt in to the new regulatory capital rules, are those that, because of size and complexity, should operate with the most sophisticated risk - management practices. the anpr lays out objective criteria, including asset size and foreign exposure, to identify the large, internationally active banks that would be considered mandatory banks. naturally, there are also thousands of banks in the united states that do not qualify as large and internationally active and for which the advanced

. to illustrate, banks with under $ 100 million in assets devote about 9 percent of their assets to small business lending on average, whereas banks with over $ 10 billion in assets invest only about 2 percent of assets in these loans. while such a simplistic analysis may sound appealing on the surface, it is clearly incomplete. it neglects the fundamental nature of mergers and acquisitions as dynamic events that may involve significant changes in the business focus of the consolidating institutions. that is, banks get involved in mergers and acquisitions because they want to do something different, not simply behave like a larger bank. the simplistic comparison of the lending patterns of large and small banks also ignores the reactions of other lenders in the same local markets. other existing or even new local banks or nonbank lenders might pick up any profitable loans that are no longer supplied by the consolidated banking institutions. these other institutions may also react to m & as with their own dynamic changes in focus that could either increase or decrease their supplies of small business loans. thus, even if merging institutions reduce their own supplies of small business loans substantially, the total supply of these loans in the local market need not decline. there have been a number of recent studies of these dynamic effects of bank mergers and acquisitions, some of which we heard about this morning. the results suggest that the dynamic effects of mergers and acquisitions are much more complex and heterogenous than would be suggested by the increased sizes of the consolidating institutions alone. for example, mergers of small and medium - sized banks appear to be associated with increases in small business lending by the merging banks, whereas mergers of large banks may be associated with decreases in small business lending by the participants. on average, mergers appear to reduce small business lending by the participants, but this decline appears to be offset in part or in whole by an increase in lending by other banks in the same local market. these other banks may pick up profitable loans that are dropped by merging institutions, or otherwise have dynamic reactions that increase their supplies of small business lending. moreover, these results do not include the potential for increased lending by nonbank firms. the bottom line is that small business loan markets seem to work quite well. creditworthy borrowers with financially sound projects seem to receive financing, although they sometimes have to bear the short - term switching costs, such as temporarily higher loan rates and collateral requirements, of changing banks after their institutions merge. on - going technological change in small business lending