colleague governor mike kelley has stated that we are likely to see some disruptions to economic activity because of year 2000 problems but the effects are likely to be temporary and quickly reversed. this outcome also seems likely to me. overseas, the early signs are that europe has successfully converted its computer systems to the euro, but there were some periods early in the transition when the settlement of some cross - border transactions in europe did experience end - of - day glitches. it is now important for senior management of major european institutions to turn their attention to preparations for the year 2000. asian financial and other business firms, too, should focus energy on preparing for the year 2000 even as they are restoring fundamental financial soundness. indeed, the events of the last 18 months have probably distracted their attention from this problem. it is in everyone ’ s interest that we not become complacent as we enter these last 12 months before the start of the new millennium. conclusion the federal reserve has an important role to play in our economy. however, our role in the economy should be kept in perspective. we control just a few of the levers that drive the economy. we observe consumption, investment and labor market decisions and try to adjust monetary policy to the signals that we receive so that our nation ’ s economic welfare is not threatened by inflation or by growth that is below the economy ’ s potential. however, it is the decisions and actions that you take as consumers and business managers that ultimately determine the health of the united states economy. despite difficult periods, 1998 turned out to – 6 – be a very good year because of a mix of private action and economic policy. i hope that 1999 will be as good to us all. * * *

to the risks that the bank is taking, and that supervisors should allow banks optionally to use their own internal statistical models and processes to calculate their minimum capital requirements - provided that the internal models and processes meet certain minimum quality requirements. basel ii explicitly does not seek to change settings for the minimum level of capital in the banking system overall - only to make the minimum level for an individual bank more sensitive to the risk of unexpected loss faced by that bank. at this stage, i know of no supervisor who thinks there should be large reductions in bank capital in their jurisdiction upon the introduction of basel ii. indeed, concerns that basel ii might lead to stability - threatening reductions in bank capital have led supervisors worldwide to scrutinise very carefully the quantitative calibration of the basel ii, and to put in place arrangements for a cautious transition from basel i to basel ii. in new zealand, the question of whether our requirements for the overall minimum level and quality of bank capital should be higher or lower is an ongoing workstream for us, quite aside from basel ii and considerations of risk sensitivity. regulatory capital requirements for banks incorporated in new zealand will be calculated under basel ii from january 2008. in new zealand, banks will not be required to use internal models approaches, and those that do not will use " standardised " approaches, which link minimum capital requirements to external measures of risk. banks applying to be " accredited " to use internal models to calculate minimum capital requirements will need to submit their applications to the reserve bank by july this year. information requirements for accreditation submissions have been disseminated. among other things, the requirements ask banks to support their applications with reference to loss data relevant to new zealand risk circumstances wherever possible, to support any case made that the internal models are appropriate for use in new zealand. a key focus for the reserve bank in assessing accreditation applications will be on how a bank's proposed internal models approach addresses the bank's credit risk exposure to losses on housing loans. this focus reflects that housing loans make up the largest part of banks'exposures in new zealand. new zealand banks are, through the extension of housing loans, potentially vulnerable to fluctuations in household income, interest rates, and the level of household debt. with the economy's strong performance over recent years, there has not been stress due to these factors on the ability of households to service their mortgages, hence the experience of default on housing loans has been minimal. however, as noted earlier, the focus of capital