From the Federal Reserve's perspective, delving into the results of QIS4 is an appropriate response by the agencies. But we should also acknowledge that this follow-up work has its limits. We can go only so far with the data given to us. We must recognize that banks--understandably--might not yet have their data systems ready to develop Basel II risk parameters and that it might take more time before we see Basel II parameters based on truly credible systems. But, in our view, that is not a reason to stop working.

As we move to refine and implement the Basel II framework for credit and operational risk, we need to strengthen the framework for market risk and encourage further improvements in how firms capture the possibility of extreme events.

Regulators recognize that Basel I can be enhanced and that the Basel II standardized approach is not well suited to the needs of our domestic-focused community banking organizations. Accordingly, we are now seriously considering making some targeted adjustments to our existing regulatory capital rules and looking for ways to enhance their risk sensitivity without increasing regulatory burden.