increasing globalization was a major factor that led the u. s. banking agencies to negotiate the basel i agreement in 1988. of course, the extent of globalization of both financial and real product markets is even more extensive today, and systemic financial problems will not respect national borders. thus, it remains very much in the interest of the united states to continue to encourage international cooperation and consistency in regulating and supervising those banks that pose the greatest potential systemic risk. for this reason, we have chosen to work with our international and domestic colleagues on the basel committee to develop a new capital framework for the largest, most complex, and most globally active banking organizations. to maintain u. s. and global financial stability, we want to ensure that banks, particularly our largest and most complex institutions, will remain able to serve their customers and meet their obligations as lenders and counterparties during periods of economic or financial stress. that requires, of course, that banks have both adequate capital and strong risk management. because confidence promotes stability, it is also important that supervisors and market participants are able to assess for themselves the financial soundness and risk - management capabilities of these institutions. basel ii is a comprehensive framework for improving bank safety and soundness by more closely linking regulatory capital requirements with bank risk, by improving the ability of supervisors and financial markets to assess capital adequacy, and by giving banking organizations stronger incentives to improve risk measurement and management. the framework encompasses three elements : riskfocused regulatory capital requirements, supervisory review, and market discipline. these are the socalled three pillars of basel ii. under pillar 1, the risk sensitivity of minimum risk - based capital requirements would be much greater than under the current accord. this greater sensitivity would be achieved by linking each banking organization's capital requirement to empirically based measures of credit and operational risk, as determined in part by risk parameters estimated by that organization, such as a loan's probability of default and its expected loss given default. the methods used to construct such estimates would be subject to supervisory standards, guidance, and reviews, including a requirement that the risk parameters used for pillar 1 be consistent with risk assessments actually used by the bank for its internal risk management. the pillar 1 treatment of credit risk also reflects more accurately the riskreducing effects of guarantees, credit derivatives, and securitization, thus improving regulatory capital incentives for banks to hedge portfolio credit risks. the incorporation of operational risk in pillar 1 is also a significant step, which recognizes that

conditions and the steep downturn in economic activity. the communication of asset purchases changed with qe3. in september 2012, the fomc launched an open - ended asset purchase program in which it directed the new york fed ’ s open market desk to conduct purchases at an announced monthly pace until there was “ significant improvement ” in the outlook for the labor market. later, the fomc noted that the monthly pace of purchases was data dependent, allowing the pace to be revised up or down based on its assessment of progress toward its long - run objectives. both of these types of asset purchase programs were aimed at putting downward pressure on long - term yields. 1 table 1 provides a summary of various studies ’ estimated effects of the fed staff analysis has focused mostly on the so - called stock effects of the purchase programs – that is, persistent shifts in asset prices observed as the result of a qe program. while these stock effects are well documented in the literature, there have been relatively fewer studies of “ flow effects ” that may occur at the time of qe transactions ( for example, see stefania d ’ amico and thomas b. king ( 2013 ), “ flow and stock bis central bankers ’ speeches these programs on the term premium on 10 - year treasury securities. for example, the decline in 10 - year treasury yields associated with the first purchase program is estimated to have been as large as 100 basis points. the documented effects associated with subsequent programs are generally smaller. these results raise the question of whether the marginal effect of asset purchases has declined over time. while that question is a valid one, our conclusion is that asset purchases over more recent years have provided meaningful stimulus to the economy, and continue to do so. figure 2 provides a current estimate, based on fed staff calculations, of the effect on the term premium on 10 - year treasury securities from the combination of all asset programs. 2 the results suggest that the fed ’ s balance sheet programs are currently depressing 10 - year treasury yields by about 110 basis points. and, with the fed continuing to hold these securities, they should apply downward pressure on rates for some time. the declines in long - term yields have led to an associated drop in long - term borrowing costs for households and firms and higher equity valuations. thus, the asset purchases have helped make financial conditions overall more accommodative and have provided significant stimulus for the broader economy. as shown in figure 3, a recent study estimates that the qe programs