banks taking on almost identically the same risks as if the loans were kept on the books of the bank the old - fashioned way. but while the credit risk of a securitized loan pool may be the same as the credit risk of holding that loan pool on the books, our capital standards do not always recognize this fact. for example, by supplying a standby letter of credit covering so - called “ first - dollar ” losses for the conduit, a bank might be able to reduce its regulatory capital requirement, for some of its activities, by 90 percent or more compared with what would be required if the bank held the loans directly on its own books. the question, of course, is whether the bank ’ s internal capital allocation systems recognize the similarity in risk between, on the one hand, owning the whole loans and, on the other hand, providing a credit enhancement to a securitization conduit. if the risk measurement and management systems of the bank are faulty, then holding a nominally high capital ratio - - say, 10 percent - - is little consolation. in fact, nominally high capital ratios can be deceiving to market participants. if, for example, the bank ’ s balance sheet is less than transparent, potential investors or creditors, seeing the nominally high 10 percent capital, but not recognizing that the economic risk capital allocation should, in percentage terms, be much higher, could direct an inappropriately high level of scarce resources toward the bank. credit derivatives are another example of the evolution. the bottom line is that, as we move into the 21st century, traditional notions of “ capital adequacy ” will become less useful in determining the safety and soundness of our largest, most sophisticated, banking organizations. this growing discrepancy is important because “ performance - based ” solutions likely will continue to be touted as the basis for expanded bank powers or reductions in burdensome regulation. for example, the federal reserve ’ s recent proposed liberalization of procedures for regulation y activities applies to banking companies that are “ well - capitalized ” and “ well - managed. ” similarly, the occ ’ s recent proposed liberalization of rules for bank operating subsidiaries applies to “ well - capitalized ” institutions. also, industry participants continue to call for expanded powers and / or reduced regulatory burden based on “ market tests ” of good management and adequate capital. it will not be easy reaching consensus on how to measure bank soundness and overall bank performance. it

. a key element underlying this positive outlook is the fact that the us economy is continuing to grow at a high rate, but the strong recovery and the acceleration of growth in other areas also support this view. the strongest level of performance is currently being recorded in emerging market economies in south - east asia, while the broad outlook in japan remains uncertain. there is also further evidence that economic activity in the euro area continued to expand strongly after the third quarter of last year. while euro area estimates for the fourth quarter of 1999 are not yet available, data for individual member states point to continued robust output growth. in addition, area - wide industrial confidence increased further around the turn of the year and consumer confidence remained at the high level reached in the last two months of 1999. the cyclical upswing should extend well into 2000 and continue thereafter. this is also confirmed by available forecasts, which point to real gdp growth of slightly over 3 % in 2000. as for 2001, the economic expansion in the euro area is generally expected to continue at a similar pace. developments in the exchange rate of the euro, which do not reflect the underlying strength of the euro area economy, remain a cause for concern. their upward impact on import prices is having a negative effect on the price climate and is thereby increasing the risks to price stability in the medium term. with regard to most recent developments in consumer price inflation, as measured by annual increases in the harmonised index of consumer prices ( hicp ), the upward movement has continued. in january 2000 the annual rate of hicp inflation was 2. 0 %, up from 1. 7 % in december 1999. as in earlier months, the latest upward movement is the result of the increase in energy prices, which, on an annual basis, reached 12. 0 % in january. excluding the more volatile components, namely energy and seasonal food, hicp inflation in january increased slightly to 1. 1 % on account of somewhat higher price increases for non - energy industrial goods. while it is likely that annual inflation rates will fall again in the course of 2000, owing to base effects related to the price of oil, monetary policymakers need to look beyond developments over the next few months, i. e. policy will need to focus on the risks to price stability in the medium term. indeed, whereas most forecasts still point to average inflation of below 2 % in 2000 and 2001, they are based on rather favourable assumptions and generally seem to imply a pattern which is characterised