under pillar 3, to ensure adequate transparency for market participants, customers, and counterparties, so that market discipline can also work effectively to differentiate risk exposures among banking organizations. i would like to stress that the basel ii framework has three pillars and note that pillars 2 and 3 are critical components of the overall framework. they should not be overlooked. as i noted, proposed reporting requirements for institutions planning to adopt basel ii and the updated market risk rules in the united states were also recently published in the federal register. each institution that qualifies for and applies the basel ii capital rules and the updated market risk rules would file quarterly regulatory data, some of which would remain confidential, for the agencies ’ use in assessing and monitoring the levels and components of each reporting entity ’ s risk - based capital requirements and the adequacy of the entity ’ s capital. these data also would support the agencies ’ efforts to analyze the quantitative impact and competitive implications of the basel ii capital rules and the updated market risk rules on individual reporting entities and on an industrywide basis. in addition, the reporting schedules will help clarify for these entities our expectations surrounding the systems and other infrastructure necessary for implementation and validation of the two proposals. the submitted data would supplement on - site examination processes, and the data released publicly would provide other interested parties with information about banks ’ risk profiles and capital adequacy. importance of the regulatory capital proposals while our reasons for moving to basel ii have not changed since we began this endeavor, i believe they are worth reiterating. our core reason is that the current basel i framework is inadequate for the largest, most complex u. s. banking organizations. the current basel i capital requirements simply are not able to capture the full array of risks facing these organizations. for example, they do not explicitly recognize the operational risk embedded in many of the services from which the largest institutions generate a good portion of their revenues today. further, basel i does not differentiate the riskiness of assets within the major asset types based on either borrower creditworthiness or the presence of collateral or other risk mitigants. this lack of sophistication can lead to significant distortions and capital arbitrage. the capital required for each exposure should reflect the credit risk of that particular exposure. as banks consciously choose to take higher risk exposures, basel ii requires them to hold additional capital to reflect their business choice. basel i capital is fixed throughout economic and business credit cycles, and as such, does

safety and soundness to ensure firms have the appropriate risk identification and risk management processes for prudent banking. we hold them to standards that require them to be resilient to a broad range of potential risks such as credit, market, liquidity, and operational risk. one specific risk is employee “ misconduct risk. ” we define this as the potential for behaviors or business practices that are illegal, unethical, or contrary to a firm ’ s stated values, policies, and procedures. the impact of employee misconduct extends beyond the individual and can impact the firm as a whole, as well as the economy and financial markets more broadly. that is, misconduct risk has both prudential and financial stability implications. for a firm, employee misconduct can make it less resilient by diverting management attention, by harming the firm ’ s reputation in a way that impedes its business, by driving adverse change in the composition of the workforce, or by depleting its capital through losses or fines. since 2008, 1 / 5 bis central bankers'speeches for example, firms have paid, in aggregate, in excess of $ 320 billion in fines related to misconduct. 2 for the broader economy and financial markets, misconduct can inflict harm directly on consumers and employees. in addition, over time, market participants may lose confidence in the financial sector as a whole and adversely impact the sector ’ s critical role in financial intermediation. in 2016, for example, gallup found that confidence in the financial sector had fallen by half over the previous decade. 3 these incidents of misconduct can introduce frictions and raise the cost of financial intermediation, which in turn, reduces the flow of productive financial services. these sorts of external effects that spill over to other firms, consumers, and businesses are a critical rationale for official sector intervention related to employee misconduct. in the u. s., official sector concern with the damage inflicted by employee misconduct dates back to the banking act of 1933. 4 more recently, supervisors have traditionally addressed firm ’ s management of misconduct risk by assessing the effectiveness of firms ’ risk management and internal control functions, such as compliance and audit. yet, despite regulations, supervisory focus, and firms ’ own efforts, significant misconduct risk and bad outcomes continue. why? what explains this persistence? one hypothesis is that recent problems are just a stream of idiosyncratic events, random draws of “ bad apples. ” another hypothesis is that some firms have operational weaknesses, “