ROYCE: Thank you, Mr. Chairman.

Chairman Bernanke, I think the -- the risk -- risk weighting at the end of the day is -- is only as good as the metrics that we develop. I'm thinking back to Basel I. And now we're looking at the final Basel III. The Basel III includes a risk weighting of 20 percent for debt issued by Fannie Mae and Freddie Mac. And the rule includes a risk weighting of zero for -- unconditional debt issued by Ireland, by port -- by Portugal, by Spain, by other OECD countries with no country risk classification.

Both of these risk weightings are, in my memory, identical to the risk -- risk weightings under the original Basel I. So my -- my concern is that we should have learned a few things about those metrics given the -- consequences of -- of the clear failure. And yet, here we have the accord of 1988 looking an awful lot like this particular accord. Given what we have experienced, the failure of the GSEs, the propping up of many European economies, do you think these weightings accurately reflect the actual risk posed by these exposures?

BERNANKE: So Basel III and all Basel agreements are international -- you know, international agreements. And each country can take that floor and do whatever it wants, you know, above that floor. We would not allow a U.S. bank to hold Greek debt at zero weight, I assure you.

ROYCE: Yeah.

BERNANKE: In terms of GSEs, the GSE mortgage-backed securities have not created any loss whatsoever. They have to the taxpayer, but not to the holders of those securities. So that, I don't think, has been a problem. It's not just risk weights, though. But Basel III also has significantly increased the amount of high-quality capital that banks have to hold for a given set of risk -- risky assets.

The new requirements, while big improvements, are not as high as I would have liked, and the agreement contains some provisions I would have omitted or simplified. In coming years we may well seek changes. Indeed, I continue to be a strong advocate of establishing simpler, standardized risk-based capital requirements and am encouraged at the initial work being done on the topic of simplification in the Basel Committee. And we will certainly simplify the final capital rules here in the United States so as to respond to the concerns expressed by smaller banks. But opposing, or seeking delay in, Basel III would simply give an excuse to banks that do not meet Basel III standards to seek delay from their own governments. It would be ironic indeed if those who favor higher or simpler capital requirements were unintentionally to lend assistance to banks that want to avoid strengthening their capital positions.The new requirements, while big improvements, are not as high as I would have liked, and the agreement contains some provisions I would have omitted or simplified. In coming years we may well seek changes. Indeed, I continue to be a strong advocate of establishing simpler, standardized risk-based capital requirements and am encouraged at the initial work being done on the topic of simplification in the Basel Committee. And we will certainly simplify the final capital rules here in the United States so as to respond to the concerns expressed by smaller banks. But opposing, or seeking delay in, Basel III would simply give an excuse to banks that do not meet Basel III standards to seek delay from their own governments. It would be ironic indeed if those who favor higher or simpler capital requirements were unintentionally to lend assistance to banks that want to avoid strengthening their capital positions.

Given the centrality of strong capital standards, a top priority this year will be to update the bank regulatory capital framework with a final rule implementing Basel III and the updated rules for standardized risk-weighted capital requirements… I think there is a widespread view that the proposed rule erred on the side of too much complexity…

The Federal Reserve also intends to work this year toward finalization of its proposals to implement the enhanced prudential standards and early remediation requirements for large banking firms... Once finalized, these comprehensive standards will represent a core part of the new regulatory framework that mitigates risks posed by systemically important financial firms and offsets any benefits that these firms may gain from being perceived as "too big to fail."

We also anticipate issuing notices of some important proposed rulemakings this year. The Federal Reserve will be working to propose a risk-based capital surcharge applicable to systemically important banking firms. This rulemaking will implement for U.S. firms the approach to a systemic surcharge developed by the Basel Committee, which varies in magnitude based on the measure of each firm's systemic footprint...

Another proposed rulemaking will cover implementation by the three federal banking agencies of the recently completed Basel III quantitative liquidity requirements for large global banks. The financial crisis exposed defects in the liquidity risk management of large financial firms, especially those which relied heavily on short-term wholesale funding. These new requirements include the liquidity coverage ratio (LCR), which is designed to ensure that a firm has a sufficient amount of high quality liquid assets to withstand a severe standardized liquidity shock over a 30-day period…

I think there is a widespread view that the proposed {Basel III} rule erred on the side of too much complexity.