i framework, such as the firm ’ s correlation assumptions within and across portfolios and the rigor of its stress testing programs. finally, under pillar iii, supervisors will seek to ensure that accurate information about risks will be disclosed by banking organizations. areas of possible concern with basel ii procyclicality while i have emphasized the various benefits of basel ii for effective supervision and the preservation of financial stability, there clearly are some possible downsides of the new approach. concerns have been raised that the adoption of the new accord will have some destabilizing effects on the international financial system, and emerging market economies in particular. chief among these is the concern that basel ii will amplify procyclicality as basel ii adopters severely tighten credit standards in response to rising capital requirements in the event of deterioration of credit conditions. we do expect that minimum capital requirements will rise and fall in response to changes in the risk of a bank ’ s activities, just as the internal economic capital models currently used by banks reflect changing risk exposure by changing capital levels. by itself, this will mean that, even with some changes the basel committee made over the years to lessen the effect, some procyclicality still remains. however, the procyclicality debate should include not only whether capital requirements will rise and fall with economic cycles, but also whether the new requirements provide useful signals to banks, supervisors, and market participants that will lead them to take appropriate action in response to a changing economic environment. with more gradations in the basel ii framework, banks, supervisors and the marketplace will have an early warning signal when credit quality deteriorates and when it improves. a more risk sensitive measure should give bank managers accurate signals to adjust lending policies in a more gradual manner early in cycles, dampening severe contractions or expansions in lending. with its emphasis on planning and risk analysis, the new accord will require banks ( and their supervisors and rating agencies ) to think more systematically about the level of capital needed during upturns in order to weather downturns. herding behavior another concern that some have raised is that the uniformity imposed by basel ii in calculating capital requirements will result in homogeneous assessments of risk, which in turn will amplify herding behavior in the market place. the new accord does set requirements for bank risk management by requiring certain types of inputs, and it does set the correlation factors for asset types, but it does not mandate that all banks must have

probably curb debt - financed investment. the question is whether this will eliminate the lowest priority investments. in the long run, we are dependent on long - term investment. interest rate changes may therefore have adverse effects in norway that do not occur in other countries. ” this stands in contrast to the current view, as expressed by norges bank ’ s delegating authority, the ministry of finance : 2 “ the new guidelines for economic policy also imply that monetary policy has been given a clear role in stabilising economic developments. this means that the scope for manoeuvre in monetary policy should be used if the outlook for the economy changes. ” in the 1950s and 1960s, a strong belief evolved that the economy could be controlled and steered in the desired direction. this optimistic view gradually lost favour in the face of developments. the way in which economic policy is oriented today reflects the experience gained and the lessons learned in the 1970s and 1980s. 3 economic policy at that time was marked by coordination, control and regulation. important elements were : • fiscal policy oriented towards full employment see jahn, gunnar, alf eriksen and preben munthe ( 1966 ) : norges bank gjennom 150 ar ( a history of norges bank ). in norwegian only. norges bank ’ s printing works, oslo. cf. report no. 1 ( 2003 - 2004 ) to the storting, national budget for 2004. ministry of finance, oslo. hermod skanland is in the process of completing “ doktriner og økonomisk politikk ” ( doctrines and economic policy ), which provides a very interesting discussion of post - war economic policy. • credit regulation within limits specified in a separate credit budget • channelling of loans through the state banks • regulation of capital movements • low nominal interest rates stipulated by the government authorities • a fixed, though adjustable, krone exchange rate • use of price regulation • an active business policy through state ownership and state grants and subsidies the use of price regulation was particular to norway. the following description is by petter jakob bjerve : 4 “ a characteristic of postwar norwegian economic policy, compared with policies in other countries in the west, is that prices have largely been directly set by the authorities, while wages and other income have been determined by the market and by market organisations. with the high level of employment that the government sought to achieve in the 1970s, inflation was probably lower with price regulation than it would have