to capture weaker parts of the economic cycle. to address this problem, the agencies have proposed a supervisory mapping function that can be used in the interim by those institutions unable to estimate appropriate downturn lgds. the mapping function allows an institution to “ stress ” its expected lgds, generating an input to the capital calculation that conforms to the basel ii requirements and hence produces a more appropriate capital requirement. the federal reserve supported the introduction of this supervisory mapping function, as an important component of u. s. basel ii implementation, in order to address a specific challenge articulated by the industry. banks would be able to shift from using the mapping function to using their own internal estimates of lgds when their own estimates become reliable. about a month ago, the basel committee released the results of qis5, which was conducted by a number of countries but not the united states, since we had already conducted qis4. as you know, the qis4 results from u. s. institutions are not completely comparable with the qis5 results from institutions in other countries. nonetheless, some similarities are worth noting. first, the aggregate declines in minimum regulatory capital of banks using the advanced approaches were similar in the two exercises, particularly considering that qis4 did not include the 1. 06 capital multiplier and qis5 did. for both exercises the aggregate declines reflected relatively good economic times - which, as we know all too well, do not last forever. second, both studies pointed to dispersion of changes in minimum required capital. the dispersion among banks in qis5 was attributed largely to a combination of differences in portfolio characteristics and differences and uncertainties in estimation methodologies. the u. s. agencies highlighted similar issues in their public release on qis4 and have stated their intention to monitor issues related to dispersion very closely in the future, because we want to ensure that the basel ii framework does indeed accurately produce similar capital for similar risk. the basel committee ’ s release on qis5 also stated that methodologies and systems for lgd calculation are still being developed and that, as a result, some of the effects of downturns may have been underestimated. the u. s. agencies'release on qis4 stated that u. s. banks also faced some challenges in estimating downturn lgds. basel i modifications at this point i would like to say just a few words about ongoing efforts to revise

ms. rivlin discusses how economists might be helpful in the current and upcoming macroeconomic policy process remarks by the vice chairman of the board of governors of the us federal reserve system, ms. alice m. rivlin, at the annual meeting of the eastern economic association in washington, d. c. on 4 / 4 / 97. i am delighted to be here today with such a large group of my fellow economists. economists are a very diverse group, but they share a basic kit of analytical tools that shape the way they approach problems. economists share a useful shorthand vocabulary - - sometimes disparaged by others as jargon - - that makes it easier to communicate with each other. they share a sense of what kinds of things are known about how economies work and, far more important, an appreciation for how much is not known about the workings of any complex human system, including the economy in which we are all living and working right now. most importantly, economists share a sense of excitement that others often find hard to fathom, about unraveling the many puzzles that abound in economic analysis. at the moment, as a relatively new governor of the federal reserve, i am particularly glad to be in a group of economists, because i can be quite sure they don ’ t share the popular stereotype of a fed governor. this stereotype has several elements : any fed governor or central banker is an inflation freak who thinks reducing inflation should be the only objective of monetary policy and a zero inflation economy would be heaven. any central banker has a firm view of exactly what growth rate the economy ought not to exceed and how high the unemployment rate ought to be to avoid inflation - - that something called the nairu is engraved on a stone tablet somewhere high on a mountain top and all we have to do is find it. moreover, this stereotypical central banker knows exactly what monetary policy ought to be in order to keep the economy on the desired track. this stereotype leads otherwise quite intelligent members of the press to believe that if central bankers don ’ t reveal this secret blueprint, it ’ s because they are being deliberately obscure and inscrutable. the media ’ s sacred calling is to interpret what central bankers really meant but out of sheer perversity did not choose to say. so it ’ s a pleasure to be in a room full of economists who know that : while the fed has access to all the latest statistics and an excellent staff to analyze them, it has not