incremental cost of adopting basel ii advanced approaches should be relatively modest compared with the significant risk - management investments they have already made. for financial institutions with a simpler organizational structure and less - complex processes and services, a less - sophisticated enterprise - wide risk - management framework is entirely appropriate. for these organizations, the incremental cost of developing advanced basel ii systems can be substantial. these organizations may appropriately choose not to adopt basel ii, especially at the earliest possible date. if they choose to opt in, they may want to implement basel ii later, when they can take advantage of vendor models and databases to assist in the development of their systems at much lower costs. in a general sense, basel ii expands advanced risk - management techniques from a set of tools used in an operating and control environment into the basis for making minimum regulatory capital reflective of risk exposures. since individual organizations employ various types of risk - management techniques, moving to basel ii as a minimum regulatory capital framework requires a certain degree of standardization so that risk measures can be compared across organizations and over time. it is composed of the now - familiar three pillars : pillar 1, minimum capital requirements ; pillar 2, supervisory review ; and pillar 3, market discipline. the framework is structured to be much more risk - sensitive than its predecessor ; for example, all commercial loans are not lumped into one risk bucket but are differentiated according to certain indicators of risk. basel ii is designed to address the concern that basel i regulatory capital ratios are no longer good indicators of risk for our largest institutions. basel ii is intended to close this gap by more directly linking regulatory capital charges to the riskiness of the corresponding assets and thereby reducing the incentives to engage in capital arbitrage. basel ii also creates a link between regulatory capital and risk management, especially under the advanced approaches, which are the only ones expected to be applied in the united states. under these approaches, banks will be required to adopt more formal, quantitative risk - measurement and risk - management procedures and processes. for instance, basel ii establishes standards for data collection and the systematic use of the information collected. these standards are consistent with broader supervisory expectations that high - quality risk management at large complex organizations depends upon credible data. enhancements to technological infrastructure - combined with detailed data - will, over time, allow firms to better price exposures and manage risk. the emphasis in the new accord on improved data standards should not be interpreted solely as a requirement to determine regulatory capital standards, but rather as

the us economy. for policymakers, the most troubling aspect of this pessimism is our inability to ascertain its cause ( or causes ) : is it geopolitical uncertainty? the aftermath of the accounting scandals of last summer? concerns about the ultimate profitability of new technologies and products? the depressive side of keynesian animal spirits? this pessimism does matter, if for no other reason than because it has the potential to become self - fulfilling. for example, high - tech equipment and software will have to play an important part in any investment recovery this year ; and as we have seen, this category may be particularly sensitive to management beliefs and expectations. time will tell how pervasive these downbeat attitudes are and what effects, if any, they will have on investment and the economy. in any case, the clear lesson of recent experience is that forecasting investment requires close attention to the expectations of those responsible for making capital expenditures. understanding these expectations and their implications is yet another challenge that policymakers must face as we do our best to help the economy toward full recovery.