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

the debate as to whether the united states is or is not a “ new economy ”. no one disagrees that the surge in the production of computers and software has been integral to the recent upswing in productivity. where the differences in view enter is over the deeper sources of productivity growth and the sustainability of the productivity improvements - that is, whether they are temporary or permanent. those suggesting that there is no “ new economy ” argue that the recent improvement in us productivity growth is easily explained : it is a combination of a normal cyclical reaction to a surge in demand and a pickup in the growth of the capital stock, most notably high - technology equipment and software. once growth in demand settles down, this view holds, and investment in high technology slows, productivity growth will moderate. even proponents of this view recognize, however, that the rapid increase in productivity and output growth in the computer industry will likely increase the growth rate of the economy over the longer term. by contrast, those supporting the idea of a “ new economy ” tell us that what we are witnessing in the us economy is the fruition of some longer - term trends in information technology, deregulation, globalization and labor markets. more specifically, proponents of a “ new economy ” contend that advances in computer power and software - combined with deregulation in the telecommunications, transportation and financial industries - have produced many new profitable business opportunities. using advances in technology and tapping into highly liquid world capital markets, many new and existing firms have been able to exploit these opportunities quickly. furthermore, the proponents of a “ new economy ” argue, information technology has produced numerous cost savings for business operations. the growing role of the internet as the medium to exchange large volumes of information and conduct efficient transactions - among businesses as well as between businesses and consumers - will lead to a further acceleration of productivity growth. thus, this view concludes, the increase in the output of the computer / software industry is both a cause and an effect of these deeper trends. we are just at the early stages of understanding the surge in productivity growth. but recent empirical work is beginning to grapple with some of these issues. it appears that a significant part of the increase in productivity relates to increased quantities of capital per worker, primarily computers and software. however, the largest part of the improvement in productivity growth has yet to be fully understood. we can not yet resolve the “ new economy ” debate. nevertheless, i am persuaded that the longer productivity improvement continues, the harder it