require ; and although regulatory capital ratios rise, they are, in effect, merely meaningless statistical artifacts. the fear of capital arbitrage got us moving, and the new risk measurement technologies offered a way to make capital regulation more risk - sensitive. thus, a significant aspect of basel ii is mending what has been broken. but, as we began to shape the new accord, we became ever more convinced that encouraging the adoption of advanced risk management is enormously desirable in its own right. internally, good risk measurement is crucial to the control of risk postures and to choices about capitalization. until the new technologies came along, and still today at many banks, choices about portfolio risk were the outcome of internal debates and struggles between those wishing to push the boundaries of prudence in search of short - term volume and those who saw the risks clearly. traditionally, the right balance was not always achieved because it was hard to distinguish the boundary between reasonable and excessive risk. this is unfortunate because a major mistake in just one business line, such as commercial real estate, can be fatal. the new risk - management technologies offer the promise of a common system of risk measurement that will support more rational, efficient, reliable internal control systems and choices about risk. moreover, under basel ii, the practices that a strong and rigorous bank management would use on its own will be used to guide regulatory minimums. basel ii seeks to eliminate the practice of keeping, as it were, two sets of books, by requiring that the parameters used to determine regulatory capital be the same as those that management uses to run the bank. to be sure, the supervisors will have to be comfortable with the internal ratings systems and other techniques used by banks to measure risk exposures and potential losses. but once verified – and periodically tested – bank managers and regulators will be using the same concepts and the same techniques. and as the measuring techniques improve, many of them may be incorporated in bank management practices – through improved estimates of loss characteristics – without changing the regulatory structure. change and innovation will improve the process, rather than undermine it. improved risk measurement also promises better - informed investors and greater discipline. if good risk measurement can improve internal discipline, then disclosing internal risk measures will help the market to understand banks ’ risk postures and to react rationally. it is important to understand that improved market discipline does not mean uniformly harsher treatment of banks by the market. bank stocks tend to trade at lower multiples of earnings than the e

ben s bernanke : us monetary policy and international implications speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at a high - level seminar “ challenges of the global financial system : risks and governance under evolving globalization ”, sponsored by the bank of japan and the international monetary fund, tokyo, 14 october 2012. * * * thank you. it is a pleasure to be here. this morning i will first briefly review the u. s. and global economic outlook. i will then discuss the basic rationale underlying the federal reserve ’ s recent policy decisions and place these actions in an international context. u. s. and global outlook the u. s. economy has faced significant headwinds, and, although the economy has been expanding since mid - 2009, the pace of our recovery has been frustratingly slow. the headwinds include the effects of deleveraging by households, the still - weak u. s. housing market, tight credit conditions in some sectors, spillovers from the situation in europe, fiscal contraction at all levels of government, and concerns about the medium - term u. s. fiscal outlook. in this environment, households and businesses have been quite cautious in increasing spending. accordingly, the pace of economic growth has been insufficient to support significant improvement in the job market ; indeed, the unemployment rate, at 7. 8 percent, is well above what we judge to be its long - run normal level. with large and persistent margins of resource slack, u. s. inflation has generally been subdued despite periodic fluctuations in commodity prices. consumer price inflation is running somewhat below the federal reserve ’ s 2 percent longer - run objective, and survey - and market - based measures of longer - term inflation expectations have remained well anchored. the global economic outlook also presents many challenges, as you know. fiscal and financial strains have pushed europe back into recession. japan ’ s economy is recovering from last year ’ s tragic earthquake and tsunami, and it continues to struggle with deflation and persistent weak demand. and in the emerging market economies, the rapid snap - back from the global financial crisis has given way to slower growth in the face of weak export demand from the advanced economies. the soft tone of global activity is yet another headwind for the u. s. economy. looking ahead, economic projections of federal open market committee ( fomc ) participants prepared for the committee ’ s september meeting called for the economic recovery to proceed at a