At a meeting last week, the Federal Reserve Board voted to put out for comment an innovative proposal on regulating the risks posed by banks' trading operations. The proposal, drawn up by Fed economists Paul Kupiec and James O'Brien, drew praise from Fed Chairman Alan Greenspan and Vice Chairman Alan Blinder - and surprised bankers and Fed watchers. Here are excerpts:
Techniques for measuring and managing market risk have been progressing rapidly in recent years, and further advances can be expected in the future. It is important that capital requirements provide incentives for such advances and that these requirements remain compatible with best practices as they evolve.