alan greenspan : federal reserve ’ s report on monetary policy testimony of mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the committee on banking, housing, and urban affairs of the us senate on 20 july 2000. * * * mr chairman and other members of the committee, i appreciate this opportunity to present the federal reserve ’ s report on monetary policy. the federal reserve has been confronting a complex set of challenges in judging the stance of policy that will best contribute to sustaining the strong and long - running expansion of our economy. the challenges will be no less in coming months as we judge whether ongoing adjustments in supply and demand will be sufficient to prevent distortions that would undermine the economy ’ s extraordinary performance. for some time now, the growth of aggregate demand has exceeded the expansion of production potential. technological innovations have boosted the growth rate of potential, but as i noted in my testimony last february, the effects of this process also have spurred aggregate demand. it has been clear to us that, with labor markets already quite tight, a continuing disparity between the growth of demand and potential supply would produce disruptive imbalances. a key element in this disparity has been the very rapid growth of consumption resulting from the effects on spending of the remarkable rise in household wealth. however, the growth in household spending has slowed noticeably this spring from the unusually rapid pace observed late in 1999 and early this year. some argue that this slowing is a pause following the surge in demand through the warmer - than - normal winter months and hence a reacceleration can be expected later this year. certainly, we have seen slowdowns in spending during this near - decade - long expansion that have proven temporary, with aggregate demand growth subsequently rebounding to an unsustainable pace. but other analysts point to a number of factors that may be exerting more persistent restraint on spending. one they cite is the flattening in equity prices, on net, this year. they attribute much of the slowing of consumer spending to this diminution of the wealth effect through the spring and early summer. this view looks to equity markets as a key influence on the trend in consumer spending over the rest of this year and next. another factor said by some to account for the spending slowdown is the rising debt burden of households. interest and amortization as a percent of disposable income have risen materially during the past six years, as consumer

reinforced their capital ratios will think. moreover, unlike spain, most of our peers have activated – or have announced the activation – of countercyclical capital buffers, which may partly explain the increase in their solvency ratios. 6 / 15 dividend policy it is worth remembering that the clearest route to strengthening capital is through the organic generation of reserves. that leads once again to highlighting the importance of profitability and, in relation to profits, of dividend policy. each bank should give structure to this dividend policy, bearing in mind its present and future capital needs. as i have occasionally indicated, in my view dividend payments are excessively rigid. they have functioned more as a fixed remuneration than as a genuine, variable distribution of each year ’ s return. in this respect, one possibility used by banks at various times has been to use scrip dividends. these allow remuneration to the shareholder to take the form of the delivery of new issued shares, instead of cash. this policy enables the necessary remuneration of capital to be combined with the organic generation of capital, although it inevitably entails some dilution of earnings per share, as also occurs whenever there are capital increases. it is the responsibility of each bank to assess these aspects when setting its dividend policy. 7 / 15 implementation of basel iii i have previously referred to the need for banks to plan their future capital requirements, whether as a result of their business projections or of regulatory changes. in this connection, the importance of strengthening, as far as possible, current capital levels should be interpreted against the background of the challenge – a further challenge – entailed by the entry into force of the final stage of basel iii. last week the eba published an update of the estimated impact that the implementation of the outstanding elements of basel iii will have on european union ( eu ) banks. according to this estimate, risk - weighted assets ( rwas ) will increase in the eu as a whole by 24. 4 %, meaning additional capital totalling €135 billion in order to respond to new needs. naturally, we should qualify these figures. let us not forget that they reflect estimates made under conservative assumptions that banks will not adjust their portfolios to lessen the attendant impact. the eba itself indicates that needs would fall to €58. 7 billion if banks decided to retain all their profits during the transitory period. the reforms will not affect all banks equally. large banks, in particular those